BRRRfect - $100k equity in 8 months thanks to subdividing parcels

[Patrick Menefee]

Investment Info:

6-unit multifamily property (3 duplexes), buy & hold investment in Statesville, NC

Purchase price: $155,000
Cash invested: $47,000 (down payment + rehab)

Successfully completed my first full fledged BRRRR just outside of Charlotte! The property came occupied in all 6 units so I continued to collect cash flow throughout the process (from September 2019 to May 2020); Purchase price + rehab cost + closing costs = $170,000 all in. Rented for a combined $2,470 per month at closing, $2,700 at refinance.

Appraised at $255,000 2 months into the pandemic!

What made you interested in investing in this type of deal?

My portfolio is made up 100% of small multifamily properties (all either duplexes or quads...still awaiting the elusive triplex). This property was perfect since it was three duplexes located on a single parcel, and I knew the cash flow potential was great. I also knew there was value to be added by improving the property to an extent, increasing rent, and subdividing the property

How did you find this deal and how did you negotiate it?

I found this on Realtor.com when I expanded my search radius outside of Charlotte. That radius slowly stretched...when I realized there was almost no supply of cashflowing multifamily properties in Charlotte, I expanded to Gastonia and picked up my first property (a week before). When I saw the better but limited supply in Gastonia, I expanded to Statesville. I knew what the market was good for (stability) and what it wasn't great for (massive expansion and growth) and knew this property would fit my criteria

The property was listed for $179,900, and since it had been sitting on the market for 3+ months I put in a low offer at $135,000 (my goal was to get it at $160k, but why not give it a shot??). They countered at $155k!

How did you finance this deal?

I secured long term financing from a commercial lender and cash from an equity partner. The partner wanted to be pretty hands off and preferred not to be on the loan, but was willing to bring almost all of the cash required, so we did a 55/45 split. We financed the rest with a commercial lender who offered a 5yr fixed rate, 20yr amortization, with 25% down and no prepayment penalty. They also financed the majority of closing costs which was a plus

How did you add value to the deal?

Our primary value add came from subdividing the property into 3 separate parcels. This absolutely increased the value of each unit by giving flexibility and increasing the pool of potential buyers. As far as rehab is concerned, most of the units turned out to be in pretty good condition and just needed to be brought up to market rent. We turned over a couple of tenants, performed one rehab, and increased rent to $450/door with everyone on 12mo leases

Total for the subdivision + rehab came out to right around $7,500

What was the outcome?

I was nervous due to the fact that I initiated the refinance right as Covid-19 hit. We initially pursued conventional lenders to do a cash-out refi, but points on investment refinances were brutal at the onset of Covid and we wound up going another route

We wound up using a commercial lender who would provide a rate/term refinance on the previous balance + closing costs, and then issue a line of credit on up to 80% the remaining equity.

Ever since the purchase I expected an ARV of around $210,000......it came in at $255,000! As a result we will decrease our monthly loan payments by $10 while obtaining a $72,000 line of credit at 4.5%!

Here are the final numbers:

• Purchase: $155,000
• Rehab: $7,500
• ARV: $255,000
• Cash left in deal: $42,000 (received about $5,000 cash from term refi)
• Cash flow: $700/mo
• COCROI: 20%
• + a $72,000 line of credit!

Lessons learned? Challenges?

Take care of your partners

The deal required a lot of flexibility in order to find a lender willing to work with the situation, to subdivide the property, and then to work through a couple different refinancing options. But at the end of the day, the most important part of all of it is taking care of those who invest with you.

He invested with me because he trusted me, and because of the results of this deal he is going to be a partner on many more deals to come. It further helped reinforce the importance of seeing your partner as truly a partner, not just dollar signs in a deal. The relationship is worth far more than the money (and naturally good relationships will lead to even more money)

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

There were a few people who helped bring the deal together, but at the end of the day the key was my broker on the deal. Alex Lopez with Verge here in Charlotte is a rockstar and has helped me on nearly all of my on-market deals