All Forum Posts by: Jake Garrity

Hi @Joseph Roberts , as far as the drywall crew, one things was their bid was a few thousand more competitive compared to the other drywall companies, so any HVAC savings would have been lost to pay the more expensive drywall crews. It was also a COVID driven decision. Specifically, at that point in the project, COVID was really becoming an issue and I had just lost my GC. Not being local, I was going to have a hard time finding a new drywall crew and getting on their schedule. So I chose to move forward with a less than ideal HVAC decision in order to prevent what could have been a multi-month delay to the project, not to mention may or may not have actually saved me money in the end. With all the uncertainty at the time, I really just wanted to keep the project moving. 

For this house, I bought it under my name. I do have an LLC now, but at the time of the purchase I did not, and I closed very fast on the purchase. Moving forward, I plan to do any cash purchase of a house under the LLC and keep it there until I refi, just for added protection during renovations.

Thanks for the questions!

After 10 months, I have completed my first BRRRR. I wanted to share a link to the update post for anyone interested in reading about the results.

https://www.biggerpockets.com/...

After almost 10 months of hard work, I have completed by first BRRRR deal. With the appraisal complete, I now have a chance to look back on the results and offer some lessons learned for others to take note of. I have detailed my planned financials vs the actual below, in the hopes of giving folks a clear cut example of how things worked out. This project was far from ideal. I made a lot of mistakes and have many lessons learned. And this was a huge renovation, which you may be able to tell from the before and after pictures I have included. But, I am thrilled to have an overall positive result in net worth, and a great experience to learn from for my next deal.

Financial Results

I had forgotten that my renovation budget was initially so low. When I was looking back to write this post I laughed when I saw what I budgeted. Clearly I had no idea the costs would be so high, but more specifically, I added many things to the scope that I didn’t first think about. Luckily, I had more than enough saved and the additional costs weren’t an issue to cover, but the important take away for me is that I now have data to better estimate costs on future offers.

Interestingly though, I also underestimated my ARV by a lot. These are things that are crucial to making good offers and getting deals, so I will be spending some a good amount of time building out my cost estimates in the future.

Why were costs so high?

You may wonder how my initial cost estimates were so far off, so here are a few examples to illustrate.

- I estimated around $5,000 for demo. However, after getting into it, I decided to gut the majority of the house and get rid of the plaster walls, especially since I needed to rewire the whole house. The extra labor accounted for $12,000 more than anticipated, not to mention the cost of 3 more dumpsters than I expected. If I needed to, I could have saved more of the plaster walls and kept the labor cost down, but I chose to gut and start new.

- I estimated $10,000 for electrical. Electrical ended up being around $16,500 for 2 reasons: 1) After getting 4 bids, the best quote was around $14k, so my budgetary estimate was just low to begin with; and 2) while my first electrician did ok, I did ultimately replace him toward the end of the project as I wasn’t happy with his attention to detail, pride of workmanship, and overall way his helper treated my other contractors. Therefore, I brought in someone new to finish the job, which gave me a chance to test out a new electrician [glad I did, the new guy is a keeper].

- I made a very bad choice on plumbers initially, and going the cheap route to start ended up costing me an extra $2,000 or so to fix their bad work.

- I underestimated the cost of a new HVAC for the second unit, about a $3,000 difference in my budget. Frankly, I probably got oversold and made a mistake on this. While I bid out the cost of the scope proposed by the first HVAC company I received a quote from and confirmed the price was ok, I instead should have had more HVAC companies walk the house and propose what they saw as the best solution. I probably could have gotten away with just installing 3 split units for much less, and my guess is that I would have heard this option if I didn’t just quote out the first bid I received. I think at this point in the project I was in a hurry to get the HVAC in before drywall started, as I had a tight window before the drywall crew would be unavailable for months. So poor project management cost me on this one.

- Finally, due to COVID, my original GC had to stop working. In order to keep work going, I had to find a new GC. This new GC would also need to handle my project management, as I could no longer fly back as often to oversee the project [I live in Texas, but the project is in Cincinnati]. The bill rate of the second GC was twice what I had been paying, but my options were limited and I needed a strong worker to get the project done. The silver lining on this is that I learned that my initial GC was great at demo, but the second GC I brought in was far better at the “rebuild” portion of the project. While his bill rate was higher, he probably saved me just as much by being more efficient and coming up with alternatives to what I was planning. I will be using my second GC as a project manager on future projects, and likely just using my first GC as a labor crew for tear outs.

- Additionally, I way under estimated the number of hours it would take to finish up the project [things like installing trim, baseboards, window sills, etc].

Cash Flow

On an ongoing basis, my mortgage + tax + insurance + water [which I cover] will be around $975/month. One unit is rented for $800/month [probably $100 or so less than market as I a friend move in] and unit 2 should rent for $900/month. So this will leave me with cash flow around $725, before I set aside money for repair and vacancy. Frankly, after doing a full renovation on this house, CapEx should be fairly low for a while. And I have a 3.5% rate on a 30 year mortgage.

Refinance

Another question people may have is in relation to the refinance. I refinanced with the same local bank that I used for my first rental property purchase a few years ago. Because they are local, they are swamped with refi requests, and I was the first investor [non-owner-occupant] they were allowing to refinance so far in 2020. The main reasons they allowed my refi to proceed: I was understanding and patient with them when they were slow to respond due to a flood of requests and COVID, and I had a good track record with them over the past 3 years. Otherwise, I might still be trying to complete the refi!

Summary

This project was an amazing education for me. Having completed my first BRRRR while living 1,000 miles away from the property, during a pandemic, I have a lot more confidence and am ready to take on my next deal. I hope this long post will help others who are considering, or preparing for, their first BRRRR. If anyone has questions, I'd be happy to help give clarifications. Thanks for reading.

Hi @Alex Smith, I came across this thread as I am nearing the end of a major renovation of a duplex and have a lot of the same questions you had in your original post. Just curious, did the bank's appraisal on your duplex come in close to what you expected? Just curious what the outcome was for you on this one. 

Hi Kenneth, wanted to share some thoughts in response to your post:

1) What neighborhoods? This really depends on your criteria and budget. Per your message, if you are looking for C+ or better, all of the neighborhoods you listed would probably be in that category, with maybe the exception of Avondale [Im not as familiar with Northside]. The difference is really going to be in cost. Hyde Park/Oakley is a very hot area right now, I think you will be challenged to find deals in a normal price range in that area. However, Norwood is a good alternative, as it is not nearly as expensive and has a good number of properties needing value add. I am in the middle of a BRRRR in Norwood myself. One other area you may want to consider is Colerain.

2) As far as Dayton, I have a property in Kettering, which is a great area but also quite competitive in the housing market. Oakwood, Beavercreek and West Carrollton are always good options. But if I were purchasing anything new in Dayton, I would find something near Wright Patterson Air Force base as the base is going through some significant expansion. 

3) I self manage, so can't help you here. 

4) Not sure about brokers either, but I do have a Cincinnati based real estate agent if you need a recommendation. 

Hope that helps!

Jake

@Alex Jones Hi Alex - here are my answers to your questions: 

• How did you come up with a maximum allowable offer for the property?

I have my own spreadsheet that I have developed where I estimated the costs for renovation, the anticipated rent, and the ARV. For my offer calculation, I followed the formula of: [(69%*ARV) - Repair Estimates] = Max Offer.

I use my own spreadsheet that has more localized cost data, my specific costs for the flooring, cabinets, and other finishings I planned to utilize, and my experience with contractor bill rates in the area. This is just a spreadsheet I have build over time.

For my max offer formula: You will see this same formula used across BiggerPockets articles, Podcasts, etc. with different percentages multiplied against the ARV, usually 70% - 75%. I wanted to build just a little more wiggle room in my numbers, so I generally use 69%.

After my initial offer was accepted, I did a full walk through and inspection of the property, and revised my renovation estimates. I also verified zoning was correct, confirmed my ARV, etc. Once this was complete, I revised my renovation numbers and updated the formula. For this specific house, I found a few issues that were not known at the time of my offer, and through negotiation I was able to negotiate the purchase price to a number that was in line with the calculation above.

• How did you come up with ARV in the area? via real estate agent? Yourself?

I calculated the ARV by looking at similar duplexes in the area that have sold in the last 18 months, and applying a cost/sq foot calculation to determine my ARV. I also had my real estate agent provide me with her independent estimate of the ARV, and used that to confirm I wasn't way off base. I then discounted my ARV number a bit as explained above to buy myself some room for error.

• What is your timeline estimate the project expected to be completed?

I initially had a stretch goal of completing renovations by end of CY19. I think this is still attainable, but more realistically renovation will be completed by February or so [just allowing some time for slow down around holidays].

• How come you didn’t use private or hard money lenders to fund that initial project?

The simple answer is because 1) I didn’t necessarily need to, I save a lot from my full time job and can fund the deal with cash, and 2) I figure it allows me to save on the points, financing fees, interest, etc. Those are all expenses that might make a good deal harder to find, especially given the market I am investing in is pretty hot right now. Not to say the way I did it is the best or right way, but that was my logic.

• Have you read the book published by David Greene? His newest book on BRRRR investing.

Yep, sure did.

• Have you communicated with the bank or mortgage loan office on refinancing a rehabbed property and the best way to proceed such as using HD 1 form and understanding the delayed financing? There are couple of things relating to refinancing where we need to be extremely careful.

Yes, I have a local bank that I used for the mortgage on my first property. I have spoken to them about their refinancing requirements and holding period. I also have another small local bank as a backup, and will probably get mortgage options from both and compare once I get to that point.

Hope the answers above are helpful.

Jake

A few years after graduating from college I purchased my first rental property. This first investment, bought in 2017, is a buy and hold single family house that I bought 50/50 with my brother. Ever since, I have read and learned more and more about other ways of building cash flow and equity. All signs pointed to BRRRR being a great option for building my real estate investments. Based on that, I have been working toward completing a BRRRR as my next investment.

After 10 months of running numbers on over 75 properties, making 12 offers, and getting to best and final negotiations on 4 properties, I have recently completed the purchase of my first BRRRR property! My target was to buy my first BRRRR property in 2019, and I made it with a few months to spare.

Before the real work [renovating and renting out the property] begins I wanted to post about my journey to purchasing my first BRRRR investment. The process of buying a property that needs extension renovation can be daunting, so I hope the details of my journey will help others.

The Property:

The property is a duplex, built in 1900, and located in Cincinnati, OH. Each unit of the duplex has 1 bedroom and 1 bathroom, and each unit is about 700 sq. ft. This property was found on the MLS.

Side note: I live in Dallas, Texas but grew up in the Cincinnati area, so I know that market well and, unlink Dallas, I am able to find properties in my cash buying price range.

Financials:

• The listing price for the property was $60,000.
• I completed the purchase for $51,250.
• I am currently estimating $35,000 in renovation costs.
• I am covering the $86,250 budget [purchase and rehab budget] with cash I have saved over the past few years.
• Buying the property with cash allowed me to move very quickly [about 20 days from acceptance to close] and to get a better price on the property.
• The ARV [calculated based on price/sq. foot of similar small multi families in the area] is $135,000. Since this is my first BRRRR and I don't know what all to expect, I have been a bit safe in my ARV calculation, subtracting 10% from the actual ARV [$150,000].

Renovations [Currently Underway!]:

The property needs a lot of cosmetic work. While renovations have not yet been completed, the link below is a video walk through of the property where I talk about the renovations that are planned.

https://www.youtube.com/watch?v=S39DN331DaA&t=2s

Check out the video and let me know what you think! I plan to post more update videos, and plan to do a full walk through of the financials and result once I get to the refinance stage.

Rent

Once renovated I should be able to rent out both units for $750 - $800.

Refinance

My hope is to refinance via the same local bank used for my first buy and hold property, but I have a few other local banks as backup options. Still a few months and a lot of work away from this step.

...

I will continue to post updates and videos as I go through the BRRRR process. I hope this helps others who are new to the BRRRR investing process.

Feel free to comment or message me with with your thoughts, recommendations and/or stories!

Jake