Using coliving to BRRR my way to 24% cash on cash

[Jon Wu]

Hey all,

Wanted to share my story of my 3rd deal. At the close of the refi it was at 23.5% cash on cash and a 9.4% cap rate in a market where comparable multifam is trading closer to ~5.3%.

I'd done two others (maybe for another post):

1) A 3/2 house on a busy road that I converted into a 4/2 with a separate basement studio--that was re-appraised 6 months in for $95K more than I paid for it (!!)

2) A more pedestrian 5/2 that I bought as-is, no work done, and have been renting for $1K+ cashflow per month since the day I bought it

But it was really the 3rd deal I did that helped me understand the power of BRRR.

Context

I'd been working on my coliving concept Willow Communities which provides beautiful, furnished coliving houses serving 40-80% AMI earners (in my market, Portland, people making as low as minimum wage, or ~$22K a year!). It's awesome to see people living affordably together in our communities--a joy immensely greater than trying to make a return.

At the time right before I bought the house, I had just gotten a commitment from a family member to give me a relatively low rate interest-only secured loan (6%) to go find another deal to purchase, since the first two had gone so well.

The House

The Oregonian is a gorgeous modern victorian with knotty pine details that had been neglected for some time. It was an REO auction and I ultimately paid $396K for it. The main was a 3/2.5 with a massive living area, and there was a huge 800 sq. ft. shop in the rear--with a bathroom!

I was shocked the house was sitting on market for so long--over 6 months!! The house had been winterized and very few people wanted to take the risk of buying the house without testing its systems. If I were to go back I probably wouldn't take that risk again, but I knew even if I had to replace the furnace and do a couple thousand dollars extra in plumbing this was a great deal! The roof, crawl space and foundation were in excellent condition as the house was only 15 years old.

The plan was to carve another bedroom out of the main house (making it a 4/2.5) and turn the rear unit into a 2-bedroom, 1-bath accessory dwelling unit (ADU, or backyard cottage).

Rehab

There was almost no work to be done in the main house--some expensive fixes like replacing the furnace and carving out the 4th bedroom from all the space available, but all in all, about $15K with carpeting, paint, trim work, and plumbing fixes.

The ADU was the heavy lift. I was taking a totally unfinished shop and turning it into its own house! A lot of late nights, negotiating with contractors, and hand wringing later, that came out to be about $69K.

Then there were about $19K of appliances, landscaping, and other expenses.

Breathing New Life

I started with a 3/2.5 and now had a 4/2.5 and a 2/1 rear--two houses for the price of one! I had already been doing coliving for some time, so I planned to rent the main house by the room.

Here's the rent roll:

Main house (rented and managed by the room): $2,990

2br cottage: $1,495

Tiny house parking: $495 (oh yeah I forgot to mention--in Portland tiny house parking is decriminalized, so I make sure to spend the time and money to install utilities like sewer, water, and electric and host tiny house owners who want to park their units on my property)

Total rent: $4,980

Costs

Purchase price: $396K

Improvements: $103K

Holding costs: $15K

Mortgage closing costs: $15K (including a points buy-down)

Total costs: $529K ($514K before closing costs)

Financing

The house was appraised at $630K all said and done (on $514K of what I paid before closing costs) @ a 75% LTV for an investment property, yielding $472,500 in financing, or a total of $529K - $472.5K = $56.5K left in the deal. Meaning $56.5K / $529K = 10.7% equity, or 89.3% LTV. I feel pretty good about that!

Because of my points buy-down (which had a 24-month payback and 33% IRR assuming I held the house for just 5 years), my rate came in at 4.875%, for a payment of $2,500 / month.

Total PITI: $3,023.

Expenses

I have an in-house manager who's paid $150 per property, and an on-site resident who's paid $100. I budget another $200 / month for maintenance (though I anticipate given the property is brand-new, not to have significant maintenance for years to come). Given I'm serving an exceptionally high-demand portion of the population, my historical vacancy is ~2% (typically there are 4-5 bedrooms per house, and usually 1 goes vacant for <1 month per year--so my vacancy rate is between 1/60 and 1/48 or 1.7-2.1%), but even assuming 6% (which is even higher than the Portland metro), that's another $300 / month.

Total Opex: $850

NOI and Cashflow

NOI: $4,980 - $850 = $4,130

Cashflow: $4,130 - $3,023 = $1,107

Ratios

Cap rate (return on assets): 9.3%

Cash on cash (return on equity): 22.0%

Learnings and Takeaways

I'd give myself a B- on execution on this deal. It was my first real rehab or renovation, and I made TONS of mistakes--errors with contractors, security, finishes, it goes on and on. I'd estimate I paid at least $15K in tuition to the school of life--how much better would my numbers have been if I hadn't made those mistakes??

But in spite of that, I learned some amazing and inspiring lessons:

• If you have vision and knowledge of a property's value, you can afford to pay a market price--or higher!--and STILL create tons of value, for yourself and your tenants!
• Never underestimate rehabs--they always take longer and are more complicated than you think.
• Be creative--in my market (Portland), we have rules allowing for ADUs and tiny houses--those are extra sources of cashflow you would have to be crazy not to consider.
• Be prepared for your appraisal. I had a detailed binder and list of notes, PLUS a list of comparables to hand to my appraiser. It led to an easy, pain-free process for her, and a great value for me.
• Points buydowns feel like stealing--I'll save this for another post, but where else can you find a 33% IRR investment?? And that's only if you hold for 5 years!

Now that most of my capital is out, it's time to go find another deal and redeploy. Hope you enjoyed reading and best of luck to everyone out there!