Next Deal in Chapel Hill - over 1% does exist!

[Steven Griffith]

Investment Info:

Townhouse buy & hold investment in Chapel Hill.

Purchase price: $241,000
Cash invested: $20,000

I've been looking in the NC Triangle Area (Raleigh, Durham, Chapel Hill), in Charlottesville VA, and in San Antonio, TX for my next deal.
This townhouse is advertised as a SFH in Chapel Hill, NC. In reading the description and talking with the Owner, I found that it had a basement apartment which had been rented out for the past several years, currently to a Med Student at UNC.

4BR/3.5Ba end unit townhouse, in need of updates, on bus line to Med School & UNC. 3/2.5 upstairs, 1/1 down.

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

I've been looking for my next investment for a while, and specifically looking for properties that have significant cash flow potential. Every time I ran the numbers on a Duplex in the Triangle area, I had a hard time finding a deal that made sense when I financed the property. I don't have a lot of construction background/experience, so I was leery of major renovations (cost). This deal though needed minor cosmetic updates and had potential for significant cash flow.

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

I had been searching in my 3 areas for the past several months looking for my next deal. For this deal, I was checking Zillow.com and FSBO.com every morning for the past few weeks, before this house hit he market. I saw this deal at 8:00am, contacted the Owner and scheduled a showing at 9:30 (social distanced of course...looking at you, COVID), used the BP calculator to check the numbers, and made a verbal offer after the showing. Upon acceptance I sent her a contract that afternoon.

How did you finance this deal?

Back in April I had previously taken out a HELOC on my Rental property (yes, HELOCs on rentals can be done!) with the intent to use that to fund my next deal. So, I used my HELOC to fund the down payment, closing costs, and renovations.

I financed the rest of it with a 30yr fixed conventional loan at 3.625% interest rate.

How did you add value to the deal?

In the basement apartment:
I did nothing. I upped the rent to bring it closer to market value & the tenant still wanted to stay so I'll renovate that whenever she leaves.

On the upstairs unit:
Renovated the kitchen
Took out wall separating kitchen from the dining room
Put in breakfast bar
Removed two half walls to open up the floorplan
Refinished existing hardwood floors
Reglazed the bathtubs
New vanities in bathrooms
Ceiling fan/light in bedrooms
Recessed lighting in LR
Repainted

What was the outcome?

Outcome was fantastic. Upstairs just rented out for $1900/mo (had 2 families apply), and the basement was brought up to $800/mo.

P&I is around $879, HOA is $259, and property tax is around $300/mo. HELOC repayment (10yr draw 20yr repayment) is $233/mo.

So, $1671 each month. Rent is $2700, so over $1000 in the green, before accounting for CapEx, Vacancy, and Maintenance. HOA covers all ext maintenance including roof and with new appliances, HVAC, and a 2018 water heater, CapEx is low.

Lessons learned? Challenges?

Great experience overall!

I should have asked the Seller to provide a Home Warranty since I knew the HVAC was older and I wasn't planning on replacing that originally. Looking at what other properties are now selling for in the same community, I probably overpaid (I paid $241,000 and one just sold for $230,000) in my eagerness to get the deal.

My contractor was amazing - I'll definitely be using him again. I have no Reno background, and he walked me through and explained everything.

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

Nic Owings with High Country Construction in Chapel Hill NC was an amazing GC! Nic helped me find ways to save money after the HVAC broke down, was always responsive, and had some great design ideas. He was easy to work with, open, honest, and made the reno part very easy on me. He would be a great addition to any team!

City of Oaks Law, Jonathan Anderson - was my real estate attorney for closing. Much lower priced than some others. I've worked with him before - always great service!

[Steven Griffith]

Hi @Chris Hall,

Great questions!  I appreciate it and am happy to share. I also realize based on your questions that I responded to one of the original questions incorrectly - my mistake!  When I read "total cash invested" I was just thinking Reno, not Reno + Down payment (I just wrote the final check to my contractor and was in that mindset).  Thank you for catching that!  Here goes:

1) You're right - I'm sitting just (barely) over the 1% rule.  The total cost of renovations was estimated just over 15,000.  At the end, we ended up being all in on renovations at $19860, due to some unexpected finds during Reno.  So, that's where I pulled the $20,000 from - rounding.  So, 260,000 all in, rounded.

2) Thanks for clarifying this - out of pocket cash, including the down payment and reno cost, was right at $69,730 ($49,870 down payment and buyer-paid closing costs). We closed in June, and managed to get the Reno done in July. Tenant is moving in next week, and the first mortgage payment isn't due until August 1 so there isn't a mortgage due until after the tenant moves in. I used a mix of HELOC funds and personal funds for this, although I could have used only the HELOC. The goal is to now get the HELOC paid off.

3) Yes, it is a 10 year interest only HELOC which converts to a 20yr amortized repayment schedule after the 10 year draw period.

To your point, I was initially only thinking of using the HELOC as a funds source for BRRRR'ing. I don't have a lot of construction experience, though, and this made me hesitant (i.e slow) to take on big projects as I didn't have a great way to estimate costs. When I could schedule a contractor to walk a property with me, that property was usually already under contract, gone, or the Reno costs were way too high. I see that you're in Knightdale - you definitely understand, then, that the Triangle market is hot, even with COVID so when good deals hit the market, they seem to go FAST. I was fortunate that this wasn't an MLS property and was able to get in ASAP after it hit the market. In fact, the only reason that this works using my HELOC funds is because of the unadvertised Basement Apartment which provides a big boost in income. If you take look in Carrboro, and even in Chapel hill, there's a shortage of 1BR/1BA apartments so their rents are disproportionately high. Heck, you can find 2BR/1BA houses renting for 1100 in Carrboro, and yet a 1BR/1BA basement regularly rents between 900-1100. Now as I said, I kept the previous tenant to maintain the income stream at 800/mo and will renovate, update, and raise the rent in a year or two.

Hope that helps to clear things up!