Weathered the Storm: Successful BRRRR and House Hack

[Kristian Conway]

A Brief Introduction

We recently just completed a BRRRR deal on our primary residence in which we are also house hacking!

Location: Louisville, KY

Purchase Price: $145,000

Rehab Cost: $43,000

ARV: $265,000

Refi LTV: 75%

We purchased the property using an FHA loan and did a live-in rehab, doing about 90% of the work ourselves. Once part of the rehab was completed we rented two bedrooms out to roommates while we finished the remainder of the house. During the rehab, rental income was $1350 and the mortgage was $1100. Now that the rehab is completed the mortgage is now $1200 following the cash-out refinance.

We funded the deal using cash reserves and 0% APR Credit Cards (do not advise but will discuss further down).

What went wrong

The biggest drawback of this deal was that it took almost a whole year to complete. I travel for work so I could basically only work on the property on weekends. This put a halt on any other investing because all our capital and time was tied up in this deal for so long.

What Went Right

• The first thing that went right was the initial purchase. The house had been on the market for quite some time so we were able to get it for ~10k under asking price. The property was also located in a really great area of town that is highly sought after. It seemed that the property had been looked over by most investors because the listing pictures were really poor. I channeled my inner Brandon Turner and noticed that the house was listed as a 2 bed/3 bath but was almost 2000 sq. ft. so I knew that there was great potential for value-add. The house is now a 4 bed/3 bath and we were able to increase the value of the home by $115,000.

• Another thing that went right was the appraisal. I spent a ridiculous amount of time studying the local market and had a pretty good idea of where the property would appraise at. The appraisal came in $3,000 less than my estimated ARV. More seasoned investors may want to be closer than that but since this was my first time estimating ARV I was pretty excited being that close to the actual ARV. That validated that I had an idea of what I was doing and gave me some great experience and knowledge.

What I could have done better

There are two big lessons I learned from this deal:

• The Use of Hard Money: Before this deal, I had bought into the negative stigma of hard money and was afraid of it. However, as I observed how this deal shook out and did more thinking on the velocity of money and opportunity cost, I realized that it would have been a better option for this deal. We funded the deal with our own cash reserves and 0%-APR credit cards. The issues with this was that our capital was tied up in this deal for the entirety of the project. This halted all other investing; thus we have the opportunity cost of the deals we could have done and then the sluggish movement of our personal capital. Additionally, by using the 0% cards I did take a substantial hit on my credit score. Luckily, my credit before the project was very strong so I was able to weather the storm BUT if it hadn't been as strong, I very well could've been in trouble when it came to getting the refinance loan.

• Just because you can doesn’t mean you should. I’ve grown up in the construction industry and am a Civil Engineer by trade. Therefore, I do have a solid knowledge of construction and this project was a great development and test of my skills. Don’t get me wrong, it’s great to be on the other side of the deal and look back at how it turned out and realize you did that with your own two hands. HOWEVER, as an investor I realized it was smarter for me to use this knowledge to oversee the construction but to let someone else perform the work. Especially with me traveling for work I could only work on weekends and ran myself absolutely ragged trying to complete the deal. I got in my own way and this resulted in a year long project and virtually every dime of my own money in the deal.

So in hindset, I would have used a hard money loan to fund the initial purchase and rehab of the project and then completed the project in 3 months instead of 12. Probably a few less grey hairs as well lol. Yes, I did save myself a lot of money BUT I lost time and opportunity which in my opinion is worth more.

Conclusion

In conclusion, I am thrilled with how the deal turned out. One, we have a property in a great area that will continue to appreciate and will cash flow great. Two, we get the chance to live in a beautiful home (we plan to move out in the next year and hold the home as a rental) while having our mortgage paid down. Three, we made the improvements, forced $115,000 in appreciation, got our capital out of the deal AND made ~$10,000. Before bigger pockets I would have laughed at you if you told me that I could get paid to own the home and improve it. There were mistakes made and a lot of blood, sweat and tears but we weathered the storm and made it to the other side of the deal. We now have our capital back and are on to pursue the next deal.

[William Merone]

@Kristian Conway Nice Job, all around!
I can totally relate to what you did with the rehab.  I did my first rehab myself which I quickly realized that it was great to get it done and have that instant gratification when it was completed however it took way too long.  Subbing out the work and managing the project will be much more efficient, and the way to go going forward.  

Goodluck on future investments!