My first BRRRR deal - SFR in San Diego

[Dean OMalley]

Investment Info:

Single-family residence other investment.

Purchase price: $455,000
Cash invested: $650,000

My first BRRRR deal. Purchased an 800 sq ft 2bd/1ba single-family residence for $455k in 2019, which my builder partner Joseph Camile and I fully remodeled and added a bathroom (total cost: $80k). Remodel took about 2 months. Unit is now rented for $2900/mo.

On the back of the 8000 sq ft lot, we are building two new units: a 1500 sq ft 4bd/3ba upstairs unit and a 1000 sq ft 3bd/2ba downstairs unit. Construction was delayed, due to permitting delays from the city of San Diego, but construction is nearing completion. Total construction cost: $500k. Projected rents are $4500 and $3500.

Hoping to cash-out refi, with a valuation of $1.5M.

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

Brandon Turner and David Greene's talk about BRRRR deals on the Bigger Pockets podcast.

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

My builder buddy found the property in San Diego and negotiated the purchase.

How did you finance this deal?

Cash deal with plans to pull cash out via a refi after the construction is done.

How did you add value to the deal?

See above.

What was the outcome?

TBD.

[Sherry Chen]

@Dean OMalley

Fantastic deal story, thanks for sharing! Does the lot have multifamily zoning to allow you to build the two stacked units in the back? What part of town is this project located in?

[Dean OMalley]

Zoning is R3. Property is in Linda Vista. There are a number of properties in the area where developers and investors are doing the same thing. Nice, big lots, which have enough space for multiple units to better utilize the square footage on the lot. 

[Sherry Chen]

Linda Vista is definitely a hot market for investors and developers, especially with the ADU play to avoid hefty Development Impact Fees. Good luck with the completion of your project! Would love to see photos of the finished product when it's all done!

[Dean OMalley]

Thanks so much! I'm eager to get this project done (we were originally hoping to have it done last spring, but...Covid). I'll definitely post photos and full write-up when it's done. 

[Eric Wallace]

Hi Dean, 

Just curious - how long did the permitting process take? My wife and I are looking to add an ADU above our SFR in Bay Ho.

Eric

[Dean OMalley]

@Eric Wallace, the permit process was painful, to be honest. We submitted early last year, right before things shut down, and we didn't get our final approval to start construction until August, so it was well over 6 months. I think things are better now, since they have their Covid process established, but San Diego is notoriously slow for permit reviews and approvals (I learned this one the hard way). 

[Eric Wallace]

@Dean OMalley Thanks for the info! Congrats on an almost completed project. Sounds like the return will be well worth the time and effort you put in.

[Dean OMalley]

Thanks, @Eric Wallace, we'll see how it goes. As with any project, it all comes down to the final numbers. If expenses are a little higher than expected or the income/appraisal are a little lower than projected, it can change the results quite a bit. Fingers crossed though...hoping this will be a repeatable BRRRR process.

[Marlen Weber]

Congratulations, @Dean OMalley. Thanks for sharing it with us and keep up the great work. 

[Justin R.]

Originally posted by @Dean OMalley:

Zoning is R3. Property is in Linda Vista. There are a number of properties in the area where developers and investors are doing the same thing. Nice, big lots, which have enough space for multiple units to better utilize the square footage on the lot. 

Nice. I've done two projects in Linda Vista very similar to what you're doing - we may be neighbors and not know it!  Well done taking the leap and making it happen!
FWIW, I've never gotten a 100% BRRRR to happen locally, but with large numbers even refiing out 60%-80% of the capital has turned out really well.

[Kevin Hunter]

@Dean OMalley, awesome deal.  Super creative and now a money maker.  Well done!!!

[Brent Fosner]

@Dean OMalley keep us posted! I’d love to know where these numbers land, and where you’re investing next.

You’re playing with some big numbers compared to what I’m doing at the moment 😆. How did you get your start?

[Dean OMalley]

@Justin R., our project is on Preece Street, where are yours? Yeah, with loan limits and valuations what they are, we're not expecting to be able to pull all the invested money out of the deal, but we're hoping to at least get close. I agree with you that BRRRR in California isn't the easiest strategy.

[Jaron Walling]

@Dean OMalley How accurate are those rent numbers? 800sqft for $2900 per month? That's crazy. You're looking at nearly $11K per month income before taxes/expenses/vacancy/etc. Amazing. 

[Dean OMalley]

@Brent Fosner, I'll keep everyone posted on this deal (I've been an avid BP podcast listener for years and I've gotten more active on the website lately, but this is the first deal I actually added to the site, so the interaction is new to me, but it's been great). My first real estate investment deal was almost 20 years ago, but REI just became my full-time "job" in 2017, when my portfolio was finally substantial enough to provide me with enough cash flow to live on day-to-day. As the saying goes, real estate is the get rich slow program...it starts small, but as long as you stick with it, before you know it, the numbers will start to surprise you.

[Dean OMalley]

@Jaron Walling, yeah, welcome to the San Diego rental market! It's pretty crazy. I was surprised we were able to get a renter in the SFR for $2900, but we actually had a number of applicants at that price point and had it filled in less than 30 days after listing. The $3500 and $4500 are projections and they're definitely on the high side for the neighborhood, but if the SFR is any indication, we feel they're pretty reasonable. All-in on the remodel/build side though, we're going to be in the $1.1-1.2M range, so it hasn't been a cheap project. My preference is still to buy out of state, where you can get a decent multi-family property for this price, but I'm taking a chance on this one, since it's my first BRRRR and I want it to be closer to home, so I can keep an eye on it.

[Justin R.]

Originally posted by @Dean OMalley:

@Justin R., our project is on Preece Street, where are yours? Yeah, with loan limits and valuations what they are, we're not expecting to be able to pull all the invested money out of the deal, but we're hoping to at least get close. I agree with you that BRRRR in California isn't the easiest strategy.

I'm across Linda Vista Blvd in that east side pocket.  The rents in your original post are too high for normal long term rental rates - what sort of strategy are you using?  I ask because those rents could be a red flag during refi and make getting the valuation you're seeking impractical.

[Garrett Jordan]

Awesome deal! Congratulations. Very creative to put an extra 2 units in the back.

[Dean OMalley]

Originally posted by @Justin R.:

Originally posted by @Dean OMalley:

@Justin R., our project is on Preece Street, where are yours? Yeah, with loan limits and valuations what they are, we're not expecting to be able to pull all the invested money out of the deal, but we're hoping to at least get close. I agree with you that BRRRR in California isn't the easiest strategy.

I'm across Linda Vista Blvd in that east side pocket.  The rents in your original post are too high for normal long term rental rates - what sort of strategy are you using?  I ask because those rents could be a red flag during refi and make getting the valuation you're seeking impractical.

We weren't sure what rent we'd be able to get for the front house after we renovated it, but we listed it at $3000 to start to see if we'd get any inquiries. We ultimately settled on $2900, which brought in several qualified applicants. The guy we rented to is a solo young professional (physician at SDSU). He just signed on for his second year-lease. 

For the two back units, we figure $3500 is realistic for the 3bd/2ba, since it's brand new and has an additional bedroom from the front house. The 4bd/3ba may be a stretch at $4500, but it's 1500 sq ft and has a nice rooftop deck with views out toward the ocean. We're definitely on the high end for the neighborhood, but we've put a lot of money into the units to make them stand out, so hopefully they'll bring in close to our projections. 

How do you see these rents as being a red flag?  

[Dan H.]

Originally posted by @Justin R.:

Originally posted by @Dean OMalley:

@Justin R., our project is on Preece Street, where are yours? Yeah, with loan limits and valuations what they are, we're not expecting to be able to pull all the invested money out of the deal, but we're hoping to at least get close. I agree with you that BRRRR in California isn't the easiest strategy.

I'm across Linda Vista Blvd in that east side pocket.  The rents in your original post are too high for normal long term rental rates - what sort of strategy are you using?  I ask because those rents could be a red flag during refi and make getting the valuation you're seeking impractical. 

>The rents in your original post are too high for normal long term rental rates

I lean this way also as my 3/2/2, 1120' SFH near Mesa College, Rentometer has at $2.8K average, $2.9K median. However, it is ~18 years since it was rehabbed. We have it rented at $2500 with knowledge that it is below market rent - A good tenant.

Most importantly he received $2.9k for a rehabbed 2/1, 800' with significant interest from perspective tenants. 

New construction (I would think more value than a rehab), 3/2,1000' (so one more BR, one more Ba, 200' more) $3.5K.   So an additional $600/month, compared to the unit he already has rented.  

New construction, 4/3, 1500' at $4500 (double the BR, 3x the BA, almost double the size) for $1100 more.  This one may be more difficult than the other two, because most people who have $4.5K for rent will not choose Linda Vista.

I am very surprised with the rent he got for his currently rented unit.  However, going off that as a rental comp would indicate he may be only a little aggressive with his rents.

I find it shocking what units rent for.  This includes our units.

[Shawn Bhatti]

What you've done sounds awesome, and you have proven people wrong who claim they cannot BRRRR because their market is "too expensive." I strongly feel that you approached this the right way as well, because I believe the best way to get a high ROI in expensive markets is to maximize the lot size (which you did). I am a newbie and haven't finished a BRRRR deal yet, but am working on 2 currently in a cheaper market. I lived in San Diego for 5 years and this gives me a lot of inspiration to accomplish this in the expensive Miami/Ft Lauderdale market. Best of luck and I hope to see the numbers when it's all finished!

[Jake Jaenicke]

@Dean OMalley congratulations on the leap and getting this project going. I am in Construction, so I get the frustration with permitting process delays and the COVID impacts, but you will get there and make it out alright. I used to live in the Linda Vista area and the housing over there always frustrated me. It was chopped up and not well thought it. Its nice to see someone have a vision for the area and go in to build some beautiful properties. If you would ever be open to running a tour of the property under construction, send me a DM. It would be interesting to see how the Contractor is doing and discuss you deal in more depth.

Congratulations again!