Year long commercial BRRRR comes to an end

[Rawn Wilson]

I have been reading everything here about investment strategies, value add deals, being inventive, making connections, the BRRRR method, and even commercial evaluations. I am so glad I did! I finished up a single family BRRRR mid 2018 and started to look for my next project. I stumbled across an interesting property on Loopnet that consisted of one lot with a single family house that had 2 apartments (one attached and one detached) and 2 automotive shops on it on a corner lot. My hobby is building race cars, so I was excited to see this property located in my own city 7 miles from my house. The original asking price was 350K which was lowered to 300K. When I called the agent, she told me a wonderful story of how a family lived there for 30 years and ran the shops until the father passed away 3 years prior. The 4 siblings rented the shops and house for a bit, but decided it was time to sell. The property was once in a remote area, but now was surrounded by a mix of residential and commercial buildings. To top it off, the agent was the sister of the deceased owner. I immediately went to the courthouse to see how this was zoned. It was BOTH on the same lot. The house was residential and the shops were grandfathered in as commercial and had to stay automotive related to do so. The house and apartments shared electric meter and both shops were tied together on a different meter. The entire property uses same city water. I made contact with the only sibling who was in the area and talked to him about his dad and the business he had. The agent made it clear it would be difficult working with all 4 siblings to accept an offer as they all disagreed on certain aspects of the sale. I figured if I could get one on my side, I could make this work. The house was an older pier/beam style house with 3 bedrooms and 2 baths. It had many levels and obvious foundation issues. The attached efficiency apartment was nasty and smelled bad. The detached efficiency apartment was torn up and unlivable. Both apartments had full kitchen, one bathroom, and one room acting as bedroom/living. For the right price I could see this working. The shops needed cleaning, but could be ready to go quickly. They even has lifts in them. House, apartments and shops all operated with window units. Even better to negotiate was that the city was tearing out all the roads and adding new underground drainage and driveways to the property. It was a mess around there. I purchased the property in November 2018 for 265K. It was funded by taking on a partner who had equity in their home. We did a HELOC for the amount. My job was getting the deal, handling renovation funding and direction, and leasing. If I can get the entire property appraised at commercial (income based valuation), then I believe I can get a high appraisal for the refinance. The plan was to use shops for renovation materials and renovate the apartments first and then the main house. I wanted to find a mechanic that would rent the entire property for $5K a month. At that income, I was hoping for a 425K appraisal. The house renovation took longer than expected and we blew the 30K budget quickly when we dropped 6K on foundation, 6K on full HVAC, and 6K on new sewer pipe along the entire property to handle everything. It was an older quirky house, and I could not find an all in one deal. I ended up leasing the house and apartments to one large family for $2100/mo. I can not sub meter the water, so I pick up water for entire property. I started to work with local banks to find out who would do this loan and work with me on value. Started the loan process while I finished the shops. It was difficult to lease out both shops individually, so I created an inventive lease. 5 year lease, 2 moths FREE to setup, $2100/mo remainder of first year, then $2750 remainder of the lease for both shops. With that, I leased it quickly. I took both leases to the bank and made the deal. It is not the BEST terms, but gets our foot in with a great bank. 5 year loan amortized at 20 years 6.4%. They agreed to loan 80% of my projected value of 425K if it passed appraisal. That would be $340K. THE APPRAISAL CAME BACK AT 525K!!! I decided to not pull out 80% of that and stick with the original $340K. With initial purchase, high interest on HELOC for a year, renovation and holding costs, we were in at $340K. So now we have a income producing home and automotive shops with ZERO money into it! How great is that? I plan to ride out the next 5 years and hope the auto shop does well. If it does, I will renew the lease with a rent increase (which raises property value) and take out a larger percentage of the value next time during the refinance (with better terms).