Rental #2 - First BRRRR

[Mark Edler]

Hello friends.

I did this deal in a tough philly neighborhood with my brothers, thinking the numbers were too good to be true. I found out quickly why they were not, but we held on and got the rehab done, tenant occupied, and refinanced as of last week!

Bought a SFR for about 40K in cash. We figured the house needed 10 - 15K of cosmetic updates, which it did not. After discovering some severe plumbing issues, replacing a roof, and more, we racked up around 35K in rehab costs (a good mix of using bad contractors and inexperience in evaluating the condition in our preliminary walk through).

Final clean up was a couple more thousand and landed us right around 80K in cost. We got the place appraised, valued at 90, and pulled about 63K out of it.

Main lessons learned:

Do not go into a fixer upper deal under-capitalized. We tried to boot strap the rehab costs instead of using hard money and ended up taking way too long to get it done (a pandemic and a civil rights riot did not help the timeline but no excuses!).

Know where your value is added! Our appraisal came back as a C4 instead of a C3 and probably ended up losing us over 20-30K in leverage on the way out. *Hint: re-do the kitchen and bathroom, and do it right. Just do it.*

Now that we are occupied and refinanced, here is our numbers:

Monthly Rent: $1,200

Principal & Interest: $337

Monthly Operating Expenses: $150

Cap Rate: 14%

Cash on Cash: 37%

These numbers look awesome but keep in mind this neighborhood is full of crime and other risk factors. Looking forward to the next!

[Rich O'Neill]

Great lessons learned there, and luckily you only have about $17k tied up and another $10k on top of that in forced equity (assuming I understood your numbers correctly). Nice! Give it a few years and you can probably get the remaining $17k back out. 

I see this all the time where clients underestimate the rehab and it ends up biting them. Unfortunately that's why the deals often make sense on the surface and they end up buying a mediocre deal when they thought it was a home run. 

Good news about real estate is that it is really forgiving if you hold on long enough in most cases. 

Best of luck with this property!