Hey BiggerPockets Community! Writing today excited and inspired as we just recently completed our first project ever in Memphis, TN and I just wanted to share the details with everyone here...while this project ended up being a big time win, it certainly did not come without a couple setbacks and bumps in the road. I wanted to share our experience here in order to help inspire others who have undoubtedly experienced similar issues.
Our first deal was a 3 bed/1.5 bath/1225 sq ft single family home in the 38118 neighborhood of Memphis. Was not a crazy rehab, and the numbers worked really well even with conservative estimates. We also worked with a couple private money investors on this deal (thanks in large part to Matt Faircloth's Raising Private Money book!) so it was a great learning experience all around. Here is a look at some of the numbers to start:
Purchase price: $52,000
Purchase closing costs: $1,250
Rehab costs: $13,650
Rehab cushion = $4,350 (I will explain the idea behind the cushion later)
Total cash due at closing: $71,250
ARV: $95,000
75% cash out target: $71,250
First thing I want to explain about the above numbers is the cushion amount. Normally we would factor in a 10-15% cushion anyways in case of unforeseen expenses during the rehab and to account for some closing costs. However since we knew this project could be completed before the typical 6 month seasoning period, we wanted to take advantage of the delayed financing exception which would allow for a cash out refinance in under 6 months. With the delayed financing exception, one of the caveats is that the cash out amount cannot exceed the lesser amount of the "total initial investment" or 75% LTV. If the numbers above played out exactly to our predictions above without the cushion, total initial investment amount would have been 52,000+13,650+1,250 = $66,900 whereas the 75% loan amount would have still been 95,000*0.75 = $71,250. In this case, the most cash-out we could have received from the refinance was the lesser of these two values, or $66,900. By adding that extra cushion ($4,350 total) to the rehab costs and having them held in escrow at closing, we were able to bring that initial investment amount up to $71,250 as well, and therefore receive more money back at the close of the refinance. I realize this may be confusing, but just trying to explain the general idea behind what looks like a 30% cushion for the rehab costs...
The rehab itself only took about 4 weeks, and we had a tenant in in just over 8 weeks, but some minor bumps in the road with the refinance process caused the additional ~2 month delay before we were finally able to close the cash out refinance last week for a total project timeline of 4 months. We ended up working with two lenders in the process: lender A was able to get everything lined up and ready to go in ~4 weeks since we began working with them immediately upon closing, but a VERY low appraisal (67k) followed by a couple unsuccessful challenges of that appraisal left us very discouraged and kind of at a crossroads. This would have left us with a ~$50k cash out amount, and leaving about 16-17k in the deal which we did not want to do. We then went to lender B for a second opinion, and within another 3-4 weeks we had a much better appraisal (104k!), but when it came down to it they could not figure out how to make sense of the delayed financing exception and include the rehab costs in the cash out amount (even though we knew we 100% set it up correctly). This again would have only allowed us to get a cash out amount of our "total initial investment" amount (just not including the rehab costs), for a cash-out amount of $53,250.
We then went back to lender A since we knew that they had the ability to close the deal, and thankfully we were able to transfer the 104k appraisal from lender B to get the deal finished. The only down side of taking this long was the additional holding costs, but even that did not have a major impact on our bottom line as we still ended up making a small profit on the deal. Here is a look at the final numbers:
Purchase price, purchase closing costs, rehab costs (from above): $66,900
Holding Costs: $3,500
Total Project Cost: $70,400
Target ARV: $95,000
Appraised value: $104,000
75% loan amount: $78,000
Refinance closing costs: $5,000 (rolled into loan)
Total cash out amount: $71,250 (limited by delayed financing exception)
Profit: $850
Once all was said and done, we made ~$850 on this deal and now have a cash flowing rental property! I mentioned that we had some private investors for this deal (totaling about ~$18,000), we were giving them 10% APR and ended up giving them all a 3% flat bonus at the end since we did so well (all included in holding costs). This yielded them a 6.33% cash-on-cash and a 18.99% annualized return respectively, which they were very satisfied with. Here is a look at the rental performance of the property as well:
Monthly rent: $850
PM fee: 9%
Mortgage amount (taxes/insurance escrowed): $554
20% reserve for expenses: $170
Total monthly/annual cash flow: $50/$600
Cash-on-cash/annual ROI: ∞ ($0 remaining in deal)
Overall we were very happy with the results of this deal, and I think it is safe to say we are officially addicted to real estate investing. Looking forward to many more deals to follow (already have the 2nd underway and looking for a 3rd right now!), thanks for reading!
