First BarrRr Completed

[Brian Pinckard]

I completed my first BrrRr project in 2017. All in all it was a successful endeavor with many lessons learned. One of which is why the third “R” in BrrRr is capitalized. That refinance piece can really be a tough nut to crack. Here’s the recap of my project.

So I did what I’ve heard a few experienced investors recommend not doing on your first flip/Brrrr and that is I bought a foreclosure on the Courthouse steps. It was about my 4th or 5th attempt at buying a foreclosure on the steps. For this one I was the only bidder standing there so I got it at the opening bid. Of course, in the back of my mind I'm thinking, "Is there something I don't know that everyone else does?" I got the house for approximately $113,000. I felt pretty confident the ARV would be between $200,000 and $210,000. We closed on May 15th and got straight to work. Overall the house was in descent shape on the inside but I knew there was some issues with the exterior from visible signs of deterioration. I budgeted $35,000 for the project with the ultimate goal of keeping my all in price below $150,000. I ended up going about $10,000 over budget mostly due to a late decision to replace the windows and a water softener system. My father and I did about 95% of the interior work but hired someone to handle the exterior work including painting. Ended up being a lot of dry rot discovered on the exterior and a lot of repair work but thankfully no TERMITES. We touched just about every surface of the interior. New kitchen cabinets, granite counter tops, new stainless steel appliances, new fixtures throughout, new outlets and switches throughout, luxury vinyl plank flooring on first floor, carpeting on second floor, new vanities in all bathrooms, new toilets, 2” faux blinds throughout, new windows (more on that at the end), and a new water softener system. Probably my favorite project (insert sarcasm) was scraping the popcorn ceiling for the entire 1500 sqft of the house.

The project took almost exactly 3 months to complete and I got the home rented on 23 August on a two year lease.

The first lesson learned is I may have over renovated the home for the neighborhood and the fact it is a rental. It’s definitely the nicest house on the block now which I know isn’t always a good thing. I rationalized this in my mind with a few things. If I do decide to sell it in a few years it is ready to move. Also this was my first time ever doing anything like this and everything I worked on was a big learning curve for me so I kind of used the house as a classroom.  This led me to trying more projects. Lastly, the upgraded finishes also enabled me to charge more for rent. The average rental for this neighborhood is probably in the $1100 to $1250 range. I’m getting $1375.

The second lesson I had was with the replacement of the windows. My original $35,000 budget did not include window replacement. About two thirds through the project I decided I really couldn’t keep the existing windows in the shape they were in with how nice the rest of the house was going to look. The replacement of the windows revealed more hidden rot which was a good thing it was discovered but led to some undoing of work I had already paid for at the beginning of the project on the exterior. Would have saved on labor if I just would have identified the windows for replacement from the beginning.

Third lesson. It probably says this in J. Scott's The Book on Flipping Houses, but recommend getting kitchen cabinets ordered right away. I ordered my Cabinets from Lowe’s and it took about 4 to 5 weeks. Then the Lowe’s installer was not able to install them for another 4 to 5 weeks after they were delivered! I ended up hiring someone else to install which was another fiasco in and of itself. Knowing what I know now I would installed the cabinets myself.

Fourth Lesson learned.  Take lots of before and after pictures.  I didn't have nearly enough before pictures.  It's nice to have before and after pictures from the same position and angles.  My plan is to have a Project summary with pictures, scope of work and numbers in case I ever need them to show my work to possible investors or lenders.

There were many other lessons but the last one I'll mention is the Refinance part of the Brrrr. After the window and water softener replacement and a few other miscellaneous items my final budget was around $46,000 which put me all in round $160,000. After I got it rented I went to work trying to do a cash out refi so I could get some capital back for the next project. What I found was that it was virtually (if not entirely) impossible to get a residential mortgage loan under an LLC. I had to move the property out of my LLC before I could get a refi. The second issue I had was the requirement to wait 6 months from purchase before a lender would do a mortgage. At about the 5th month mark thanks to @Neerav Patel on the BiggerPockets Forum, I learned it was possible to do a mortgage before 6 months if you own the property outright. I was at least able to start the process a little before the 6 month mark. I am amazed by the fact that none of the Mortgage Officers I spoke with knew the 6 month exception rule. The home appraised for $201,000 and I did a cash out 30 year refi for $140,000 at 4.625%. This resulted in about a $400 a month cash flow not including vacancy rate, Maintenance, and CapEx. Including those calculations at 8.3%, 5%, and 5% it will cash flow around $150. I was hoping for at least $200 but I'll take it for the first one.

One last OBTW, thanks to Brandon Hall's post about his BARRRR strategy I’ll be moving about $5,000 from my Renovation Capital Expenses to operating expenses for August. I had a $2000 carpet expense and an $1800 water softener expense that works nicely with that strategy.  I think I can easily meet the IRS’s intent of "inservice".

Now the search is on for the next one. Times running out on Brandon Turner’s 90 day challenge. There’s a property going to auction next week that I have my eye on. Maybe I’ll get one right at the buzzer.

P.S.  Sorry to any Harley Davidson fans but it had to go!