Hello again BiggerPockets! Just wanted to share the results and specific details of our second successful BRRRR investment in Memphis, TN. Little background here....
My brother and I are real estate investors from the Boston area. He still lives in Boston while I currently live in Hoboken, NJ, and we have decided to get into long distance buy and hold investing due to the very high prices of real estate in both of our local markets. This past summer we settled on Memphis for the first chapter in our real estate investing journey and bought our first property in July 2019. When we wrapped that BRRRR up back in December 2019 I posted about the details of this first deal (https://www.biggerpockets.com/...) and I received a lot of good questions/feedback, so figured I would post a similar summary of the 2nd deal that just wrapped up end of February 2020.
This property was a 3 bed/1.5 bath/1350 sq ft single family home in the 38118 neighborhood of Memphis. The house needed some work but nothing too crazy, and we also did some upgrades to make it more desirable to a potential tenant/buyer down the road including adding central air and converting the half bath to a full bath with a nice tiled stand-up shower to make a full master suite and a 3 bed 2 bath home. Here's a high-level look at some of the preliminary numbers:
Offer price: $53,500
Purchase closing costs: $1,200
Rehab estimate: $25,000
Estimated holding costs: $2,000
ARV: $105,000-110,000
Target 75% cash-out amount: $79,000 - $82,500
As you can see, the numbers looked pretty good up front and it looked like we would be pretty close to breaking even on the project after the cash-out refi, so we went ahead with the purchase. In my last post I discussed using Fannie Mae's delayed financing exception to allow for pulling the cash back out before the typical 6 month seasoning period, and in the comments @Steve C. led me to a post outlining a different approach using a LLC-to-personal loan (see https://www.biggerpockets.com/forums/48/topics/460294-how-to-cash-out-1-4-unit-property). Using the LLC-to-personal loan strategy establishes a mortgage on the property from your LLC to you personally and essentially just makes any subsequent refinance a traditional refinance where the seasoning period is not a concern. This opens up a lot of opportunities regarding which lender you can use and the max amount of the refinance, both of which are very useful. We used this strategy on this deal and it worked like a charm!
One setback we hit with this deal right out of the gate was a delay in the refinance on our first deal. We had the close date from the refinance on deal #1 and the close date for the purchase on this property only about 2 weeks apart (looking back this was definitely a little over-ambitious!), and when the second lender in deal #1 did not know how to close using the delayed financing exception it pushed the refi date out another month or so. We ended up having to get a hard money loan for ~20k to close in time which increased both our up front closing costs and holding costs. This also delayed the rehab as we could not come up with the first half of construction costs until the refinance closed, delaying the whole project about 3 weeks and further adding to our holding costs. Not the end of the world, but we will definitely learn from and avoid the same mistakes moving forward!
The rehab only took about 4-5 weeks and everything went pretty smoothly there. The first appraisal came back in a little lower than expected ($99k), but we ended up getting it increased to 102k by challenging the appraisal. We know we could have probably squeezed a few extra thousand with another challenge, but we were fine with 102k. The refinance closed on the same date as our tenant signing their lease only 3 weeks after the rehab was finished. However, just before the tenant moved into the property our PM discovered the brand new water heater we just installed had been stolen (there is outside access to the utility room and even though there is a metal security door they had ripped it off). This was a little bit of a spirit breaker, but all in all it was not too major just another thing to add to the holding costs. Here is a look at the rough final numbers:
Purchase price: $53,500
Closing costs: $2,600
Holding Costs: $3,500
Rehab costs: $24,000
Total Project Cost: $83,600
Target ARV: $105,000-110,000
Appraised value: $102,000
75% loan amount: $76,500
Refinance closing costs: ~$5,000 (rolled into loan)
Total cash out amount: $71,500 (limited by delayed financing exception)
Cash left in deal: ~$12,000
Once all was said and done, we left about $12,000 in this deal which was not as great as our first project where we actually made a little profit out of the cash-out refi. However, we now have added a second property to our portfolio with a good ROI that actually cash flows a little better than the first one and will make us more money on a monthly basis so still counting this as a big win! Here's a look at the numbers outlining the sustaining performance of the property:
Monthly rent: $950
PM fee: 9%
Mortgage amount (taxes/insurance escrowed): $535
Reserve for expenses: 15% = $142.50 (a little lower than usual since we took care of all cap ex items in the rehab)
Total monthly/annual cash flow: $187/$2,244
Annual ROI: 18.13%
We had some private investors in on this deal as well, and while we were not able to give them the bonus this time around we still gave a solid 10% guaranteed APR (~3% cash-on-cash over the 3.5 months of this project). Considering how crazy and unpredictable the stock market has been the last couple of weeks with the recent correction and subsequent roller coaster ride we are happy to be able to provide a more stable vehicle for our investors to grow their money while also continuing to add to our portfolio and grow ourselves as investors. Overall we are very happy with the results of this project, and we are excited to put the new lessons learned to work on the next deal that we actually are set to close on next week!
Hoping success stories like this will help some newbies take the plunge for themselves as well as continue to motivate ongoing investors, feel free to reach out with any questions/comments or just to say hi.
Cheers,
Chris
