Our first BRRRR Deal - Westerville, OH

Our first BRRRR deal

Though we have flipped (rehabbed and sold) a few houses, our primary long-term strategy is to rehab and hold rental properties. Our goal is to cover 100% of our basic living expenses with horizontal income a.k.a. passive income a.k.a. income we do not trade our time for. To that end, we are currently in the refinance process of what will be our first textbook BRRR deal in Westerville, OH. Here’s how it went down.

Note: If you’re here and you do not know what BRRRR is, read this fantastic article from @Andrew Syrios’s Bigger Pockets blog.

THE HOUSE

This is a 3 bedroom, 1 bath, ~1200sqft, classic foursquare house built in the early 1900s. It has most of the original wood finishes (never been painted white!) and the original hardwood floors. There’s a full basement and larger-than-average yard. It’s on the main drag in Westerville, OH in walking distance to the historic Uptown District. It is also walking distance to Otterbein University and sits square in the middle of the Westerville City School District. The location is absolutely ideal. Our projections going into the project looked like this:

Purchase Price: $120,000

ARV: $190,000

Rehab Cost: $31,000

Refinance: 75% of $190,000 ($142,500), pay-off hard money and leave ~$10K in the deal

Rent: $1800

BUY

We purchased this house through a local wholesaler. He negotiated the contract price with the seller and we paid him an assignment fee for the rights to the contract with the seller. The purchase price was $120,000 and the assignment fee was $7,000 for a total acquisition cost of $127,000.

We funded the deal with a hard money/short term financing lender (@FundThatFlip). They loaned us $120,000 at 11% for 9 months. We had to pay some additional closing costs, lender fees, title fees.

The condition of the house was grimy and cluttered. There was no evidence of bugs, but plenty evidence of multiple cats! There was a good deal of personal property items left in the house, cat fur everywhere, claw marks on the wood features and a general stench of animal throughout the house. Here’s what it looked like:

REHAB

Going into it, this is what we thought we needed to do (Budget = ~$30K):

Exterior

• Replace roof
• Remove deck in backyard
• Wash the siding and avoid paint.
• Clean and resurface driveway
• Install new fencing
• Clean and paint the front porch
• Remove large bushes out front
• Trim tree limbs cut back from the roof
• Remove broken concrete pavers

Interior

• Sand and refinish trim, baseboard, door jambs and original interior doors
• Refinish hardwood floors and stairs
• Replace 2 windows need in the kitchen
• Keep, but refinish and paint the kitchen cabinets and replace pulls
• Remove kitchen flooring and add flooring on top
• Replace baseboard in kitchen
• Repair drywall in the kitchen on the ceiling after we have inspected the upstairs bathtub drain
• Replace bathroom surround/tile, vanity, toilet, mirror, light, fan and fixtures and flooring, but keep and refinish tub
• Add new blinds throughout the downstairs
• Replace non-matching interior door for upstairs bedroom
• Deep clean and Drylock the basement
• Service and clean the furnace
• Unclog the floor drain in the basement

Once the rehab was done, here’s what we actually did:

• Everything listed above with a few changes
• Replaced the entire kitchen including the cabinetry and countertops
• Lifted the house and replaced the sill plate and band board in one corner of the kitchen
• Rewire the house (knob and tube)
• Replace all windows
• Replace tub, surround and vanity in bathroom
• Replaced the HVAC
• We did not install new fencing
• We did not replace the roof (we did repair the flashing around the chimney)
• We did not resurface the driveway

Actual rehab cost = ~$33,000

Rent

This is the easy part. If you’ve bought right (at a sizable discount in a good location) and rehabbed right (not cut corners), the property should speak for itself. There is some nuance in rent pricing, however. Whether you start high and wait it out or start on the lower end and flood the home with showings, each tactic can work and often depends on your goals and desired timeline. We chose a mid-level rent price to conjure interest and get people in the door. We listed at $1626/month and within 2 weeks, we had an approved tenant. For answers on your burning questions about the renting process and tenant selection, head over to the Solutions for Real Estate YouTube page and check out several of the short videos @Mitch Deminski does on the subject. Here’s how our property looked after rehab:

REFINANCE

Oh, baby. This is the best part! Once we hit the 6-month anniversary from the day we closed on the purchase of the property, we’re eligible for long-term financing. We have a couple lenders who we trust. They are responsive and understand our business. We applied for a “cash-out refinance” and were approved for excellent terms. Our interest rate will be 3.9% locked-in for 30 years! The new lender will pay-off the short-term hard money financing ($120,000) we used to fund the acquisition and rehab. On top of that, we’ll get a check! The formula the bank uses is 75% of the new appraised value. Our property appraised for $208,000. 75% of that appraised value is $156,000. That means $120,000 of the $156,00 goes toward the original loan payoff. The rest (approx. $36,000) comes right back to us! We pay ourselves back for the rehab we paid out of pocket plus a portion of the closing and holding costs we incurred. The monthly loan payment will be approximately $1,100. In each payment is a portion of the principal, interest, taxes and insurance (PITI). At our current rent amount of $1,625, we’ll have a gross cash flow of $525 a month! We will leave about $19,000 in the deal. That money has a payback period of 3.5 years and an annual ROI of 29.3%. We will also have $52,000 of equity left in the deal. The return on that equity is more than 11% per year. Note: These return calculations include a PM fee of $55/month.

REPEAT

Once you have your cash out, you can recycle it and do this all over again! We couldn’t wait that long. We bought another BRRRR deal 2 months later and will be refinancing in December 2019.

As you can see, this project did not go exactly as expected. However, it went really well! We have a cash flowing asset that puts off almost a 30% annual return on our cash and will pay us back in 3.5 years. The BRRRR strategy is a fantastic strategy for horizontal income and sustainable wealth building.

Please ask your questions and share your BRRRR experiences below.

If you’re in or near the Columbus, OH area, check out the Newbie Real Estate Investor Meetup. We meet once a month and provide a safe forum for new investors to ask very basic questions and have them answered! We talk about all kids of topics including BRRRR!

Please also check out HomeVestors.com and the Deal Makers Sessions hosted by local HomeVestors Franchisees in Columbus, OH.