All Forum Posts by: Daniel Mendez

@Daniel Mendez are you trying to buy properties off the MLS?

 Hi Daniel, welcome to DFW!!!
We are having trouble finding properties in our areas. We have gone our longest period without buying in years.  Now perhaps we are getting a little more conservative because of where we are at in the cycle.

My sense is that the market might be a little better in the secondary markets, Fort Worth or possibly one of the suburbs.  Its just not an area we know or have worked in.


A couple of things, have you thought about a house hack?  That might be a way to get started in a low risk way.  And house hack deals can actually make sense at a lower return than other investors.

Also if you are looking at a straight rental, pick a small neighborhood. Maybe a 2Mile x2Mile square. Drive the streets, set up a search either Zillow, an MLS search from a real estate agent or similar on every property that comes up for sale. GO to every open house. Get to where you can look at the picture of a house in that little area and know what the market is.

That way, when you get a deal that comes up, you will know exactly how good of a deal it is and you are confident in your bid.

Also, I would recommend you identify your criteria.  What are you looking for?  how are you creating your model to determine what you would pay for a house? Use that criteria to evaluate the properties you are thinking about buying.  Then don't chase.  If a property fits your criteria, make an offer, otherwise, pass.

Best of luck to you!!!

I gladly appreciate the advice, Bart.

If you are ever free for a coffee let me know. I am trying to network as much as possible and surround myself with like minded people. 

@Daniel Mendez

Personally I always use google voice or talk to text.

@Daniel Mendez my lender also required an LLC so I created one. It's pretty easy to set up and if you really don't feel comfortable you can have your attorney do it.

@Anvith Amin yes they do. Having a hirer FICO will give you a better rate generally speaking. 

@Daniel Mendez Not exactly. I financed the rehab with a hard money lender. He funded 90% of the purchase price and 90% of the rehab. My rehab was 30k so I only had to put 3k down towards the costs. As my work is completed I get 'draws' from the lender to reimburse my contractor. 

@Eric Williams yep exactly. He walked through the property with me and verified that it would cost roughly 30k to do this rehab. 

Here's a recount of my first BRRRR (Buy- Renovate-Rent-Refinance-Repeat) deal with specific details/numbers. This post is long and detailed, but for those who spend the time to read through it, I hope it helps.

How did I found the deal:

I found this deal on the MLS. It was a foreclosure and soon after submitting my offer, I found out another investor outbid me. It wasn't until 2 weeks later, my agent informed me the original investors financing fell through and my offer was accepted.

The Property and Location:

The property is an oversized two family house right next to a major Hospital and University in Middletown, Ct. Unit 1 has 3BR 1B and Unit 2 has 3BR 1B with 2 large rooms in the finished attic. From a location standpoint, I was pretty familiar with the area and believed it would be sought after in 3-5 years. I have already started to see many restaurants and breweries popping up in town.

Financing:

Listing: $130k 

Purchase Price: $118k

Financing: Hard Money Lender to fund 90% of the Purchase Price, 90% of the renovations for 3pts and 11.5% interest for 12 months no prepayment penalty. I had only done 2 prior deals (no flips) so the rate was slightly higher.

Rehab Budget: $30k

ARV (estimate): $215k

Rent (estimate): $2,800

• Scope of work: 
  Convert Unit 2 from electric to gas heat. Unit 1 had already been converted so I knew gas lines were in place.
• Install new on demand hot water system for 2nd floor unit. 
• Install Luxury Vinyl Plank flooring (LVP) throughout both units (Home Decorators Collection Blue Cedar Grey from Home Depot)
• Install new counter tops and cabinets in 2nd floor kitchen
• New Vanity/shower for 2nd floor unit
• Install 3 new windows
• Install Sump pump in basement
• Update washer dryer hooks (each unit)
• Paint all ceilings/walls/ trim ( Agreeable Grey from Sherman Williams)
• New appliances for 2nd floor kitchen (used from Facebook Market Place)

Holding Costs: $8,271

• 4 months of $1,284 interest only payments
• Taxes
• Utilities
• 6 months Builders Risk/General Liability Premium

After all said and done I spent $28,397 (not included holding costs) and was under budget!

Rent:

I was able to rent the top unit for $1,400 and the bottom unit for $1,375 totaling $2,775.

Refinance:

Because the renovation only took 3 months, I was looking for a lender who would refinance the deal without a seasoning period. After doing some research I came across a lender (found him here on Bigger Pockets) who would do a 75% cash out refi, 30 yr fixed @5.965% for 2.5pts, No seasoning.

When I originally financed the deal with the hard money lender I received two appraisals. The first was an as is appraisal for $120k. It also included a projected appraisal (including the scope of my work) for $220k (5k higher than my ARV!!)

Unfortunately my REFI appraisal came back at $201,500- 17k under the projected appraisal.

My lender then agreed to change the terms to 80% LTV to make this work. Two days before closing they changed their mind and could no longer do the 80% LTV, only 75% LTV. They would not budge and did not let me dispute the appraisal so I ended up dropping them and starting my search over. Moreover, I ended up finding another lender who would finance 75% cash out, 1.5pts, 30 yr fixed at 6.6% no seasoning. Their appraisal it came back @ $200,500- 1k less than the original!!!! At this point I figured I was sh** out of luck and should just eat the difference. However, I ended up writing a very detailed letter to the appraiser explaining why I think certain comps should be used vs others and he ended up increasing the value to $205,000!!!.

So after all said and done here is was the numbers look like:

Hard Money Loan

Hard Money Loan Payoff: $134k

Cash into the deal: $24k (includes 10% down on loan, 10% of rehab costs, closing costs)

Refi: 75% of $205,000= $153,750

Cash out: $153,750- $135k(hard money pay off)= $18,750

Closing costs: $9k (escrowed taxes and Insurance)

Cash left in the deal= $14,250

• Math behind it: (18,750-9k)= $9,750 (24k-9,750) = $14,250
• In other words, I was able to walk with a check for $9,750 even though I received $18,750 cash out from the bank. After my initial investment of $24,000- $9750 (check) leaves me with $14,250 left in deal as mentioned above.
• The house could conservatively sell for $220,000 in its current state. If you were to put a traditional 20% down you would be $44,000 out of pocket w/o closing costs instead of $14,250. THAT is the power of the BRRRR.

Monthly Debt Service

PITI= $1,501

Income: $2,775

Monthly Cash flow before expenses: $774

What did I learn?

Always, Always, Always have a conservative ARV. The appraisal part of the process is the only part that is completely out of your control. Another human is determining your properties value and it is completely subjective. It still boggles my mind that we do not have a automatized system for appraisals yet.

Don’t be scared to fire your contractor at any point in the process. I would personally rather pay a higher rate for a contractor that does not eat up my time/money and can execute the job correctly.

I will most likely use the delayed financing technique described in the forums on my next BRRRR.

Trying to find a lender who does not require seasoning and still has a competitive rate proved to be a challenge

DO NOT let you emotions get the best of you. It's a business, treat it like one. If I didn't get so angry with my REFI lender who changed his terms from 80% LTV to 75% at the last minute- I would be left with a 30 yr fixed rate @5.96% instead of 6.6%.

It still costs money to complete the BRRRR. You need working capital and should have reserves for the unexpected.

What’s next?

I plan on holding onto this asset. Since completely the BRRRR process, I honestly think it is one of the best methods in REI to scale and build wealth. It is NOT a get reach quick scheme, but a way to have a cash flowing asset with all the deferred maintenance complete without having to put the traditional 20% down. I have since partnered with someone and purchased a 3 family. Our intention was to BRRRR but the lack of comps in the area have steered us towards a flip.

Please comment with your thoughts, tips, advice and stories.

Investment Info:

Small multi-family (2-4 units) buy & hold investment in Lexington.

Purchase price: $180,000
Cash invested: $45,000

6 br / 4 bath duplex (3/2 on each side) purchased with Section 8 renters in place. Long term tenants whose rent is paid by Section 8.

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

tenants are in place already. The home was build relatively recently (1990) so it is all electric and doesn't have a ton to do.

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

It was a 2nd sale by a property owner who had just sold a duplex we had an offer on but lost the deal - outbid by another buyer. When we asked if they had other deals to sell they said they'll be selling the duplex across the street soon so we offered them a bit higher than we had offered on the previous duplex and they took the offer straight away.

How did you finance this deal?

Hard money lending with a private bank. 25% down through LLC

How did you add value to the deal?

Fast closing, cash down payment of 25% ready to go, lending ready to go. Easy closing terms - asked for home warranty provided by seller on this one but that was the only condition.

What was the outcome?

We have owned this property for a year and a half and been able to raise rent 2x.

Lessons learned? Challenges?

Rent always comes on time. Utilities paid by tenants. Inspections are every 2 yrs by section 8. We have been able to raise rent 3-5% each year through section 8 approvals but it is a process we have to keep up with like clockwork! Easy to put mortgage payments on auto pay since the rent is also paid by direct deposit from S8 as well. Downside - maintenance must be kept up with pretty meticulously. Not a lot of room to defer maintenance items.