BRRRR Investing gone sideways during Covid

[Travis Wylie]

Investment Info:

Single-family residence buy & hold investment in Middletown.

Purchase price: $21,500
Cash invested: $90,000

This was a BRRRR investment that went sideways, and although my partner and I lost some money in that we did not get back all of our money, I would not classify this as a failure at all. I learned many lessons and got experience with a rehab that's a full gut job. Some of the hardships during this rehab were we had a contractor who took approx. 28k in payments and did about 10k in work before he skipped town. A lot of the work that he did needed to be redone. I also had another contractor take me to court claiming he was owed payment for work he never completed. There were also hurdles with being in the middle of a rehab when Covid hit and government shutdowns were ordered. The one silver lining was that the appraisal came in 21k over what I had anticipated, which helped mitigate our losses. The thing I love about BRRRRs is that even when things don't go as planned we are still about all in for close to what we would have put down for 20% down commercial/conventional loan, but in this case we have a newly rehabbed house that should hopefully have minimal CapEx over the next few years. Our non-escrowed mortgage payment is 494 (budget another $300 for taxes/insurance) and the place is rented for 1124. Not the best cash flow, but thankfully the rest of my portfolio that I have with this partner is performing well to help offset this limited cash flow.

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

We owned the house directly next to it so I had my eye on this property for a while. I'm a fan of the area (many big businesses and Amtrak and HIA are both practically walking distance away). Another investor picked it up off Sheriff Sale and we purchased it from them. They claimed they were tied up with another rehab and couldn't dedicate the time to this house. Regardless we were interested in this property.

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

The investor listed in on Trulia so I gave her a call. We went back and forth a few times. Originally "I'm not going to settle for less than 30k" became 25k. We ended up settling on 21,500

How did you finance this deal?

I used a HELOC from my partner to fund the purchase and rehab, and we refinanced with a local credit union into a commercial 25 yr amortized loan 5/1 ARM at 4.25%

How did you add value to the deal?

Tore out all the plaster and put up new insulation with drywall. Added a closed to a bedroom and rehabbed the bathroom and kitchen. Took out a few walls downstairs to open it up and and added a half bath downstairs and a laundry room in what used to be a junky addition.

What was the outcome?

My business partner and I are all in for an amount that is similar to if we put 20% down. The cash flow could be better, but it's still cash flowing in a pretty hot market. We plan to hold onto this property for a while and reap the benefits of debt paydown and cash flow will eventually increase as rents do.

Lessons learned? Challenges?

There were man, but to start I learned a lot about contract law. Going forward I will always use a contractors contract no matter how bad it is because if things go sideways it hold more merit with Attorney General. You can always type a Scope of Work that you both sign off that details the work specifically, but previous to this I was of the viewpoint of typing up the contract for contractors because most of their contracts were junk. Not anymore.