I just finished a BRRRR in Seattle WA.
I did cash-out refi's on my 3-plex and 4-plex, pulling a combined $168k out. Both properties still cash-flowed well after the refi's and the 3-plex has zero of my capital left in it. The 4-plex has approximately $33k of my initial capital left in it. With this $168k, I took on a new project in Seattle, WA. I purchased a run-down duplex for $405k in December 2015 that was listed on the MLS for $435k. I purchased it in the same LLC that the other two properties mentioned above are in.
This property was in a prime location but had sat on the market for over 3 months, went pending and back to active many times. It was one of those properties most people are scared to take on. When I first took a tour of the property, the smell of money hit me as soon as the door opened…cigarettes and urine! I had my 9 year old son with me that day and he was very disgusted with the place when we left, he asked me why the people were living that way. To back up a bit, the water had been shut off for months and they had a plastic tub in the kitchen to catch the rain water coming through the ceiling. They had also run out of oil for the furnace, so the stove was open and on to heat the place. Also, there were 2 or 3 toddler kids running around in diapers…I’m assuming they were potty trained, but since the toilets didn’t work the diapers were a good alternative I guess. One of the people living there told me they filled up a 5 gallon bucket of water at the neighbor’s house every day so they could flush the toilet at the end of the day…pretty disgusting was right. It was even more disgusting when I took possession of the property and realized that they hadn't flushed in a while - lets just say nasty; my plumber wasn't too happy about moving that toilet :).
Before photo:
After photo:
This property was not even close to being able to finance with conventional financing, so I went the hard money route. Given the rehab I had in front of me, I convinced my hard-money guys to let me do 10% down so I had my other capital for the rehab.
Here are the initial acquisition numbers:
- Total Closing Price: $424,357.78
- Purchase price: $405,000
- Hard Money Origination Fee: $14,580 (4%)
- Closing Costs: $4,777.78
- Total Purchase Capital payment: $41,860.11
- Hard Money note: $379,080
This duplex consists of two 2 Bed/1 Bath units. I did comps for rent and value prior to my purchase. I figured the ARV would be around $600k and that each unit would rent for at least $1950 each. My initial budget for the remodel was $85k. I also ran the numbers and determined if (i.e. when) I went over-budget on the remodel, how much room would I have before positive cash flow was in jeopardy – and the math showed there was plenty of cushion for the remodel if needed.
Main floor floorplan:
The remodel took 3 months and here is a summarized list of the work:
- New Roof
- New gutters
- New Hardee plank siding
- 3 new porches/deck
- New fencing
- Massive landscaping overhaul
- Oil tank & furnace removal/decommissioning
- New vinyl windows
- New exterior doors (5)
- New plumbing (with the exception of the main line to the street)
- New electrical (all the way to the masthead)
- New electric register heat (to replace old oil furnace)
- New kitchens/appliances
- New bathrooms (gutted to the studs)
- Paint inside and out
- New flooring (LVP, tile, and carpet)
According to Quickbooks, I ended up spending $132k on the remodel…way more over budget than I thought I’d be. The big over budget item was the landscaping. I ended up opting to restore the alley access to the property and had to put in a couple of retaining walls to create two off alley parking spots, which is huge in Seattle. The landscaping cost (including the decks and fences) came in at $25k, I had only budgeted $5k for landscaping, but felt the additional $20k was a worthwhile investment. The other $25k+ of over budget items was attributed to additional stuff discovered during the remodel. The other big items were that the city required a new meter pack be installed and when we started working on the bathrooms, we realized that the only real option was to gut both of them to the studs. Also, I thought I could salvage the old exterior doors, but they had been kicked in one too many times and were just not fixable.
We passed final inspections - yes I pulled permits for this :) - on March 29th. There were several small items left to do and those were finished up mid-April. I turned it over my property management company in early April and we have tenants moving in mid-May for $1975 each unit. I did put in sub-meters for the water and have a submeter billing service as well. So all utilities will be paid for by the tenants…I on the other hand have a fixed month sub-meter billing fee that will be predictable.
Last week I just finished the cash-out refi. Given the current loan climate, I had to use portfolio lending (aka commercial financing) to do this. The duplex was appraised on April 1st for $775,000; a lot higher than I had planned (I’m not complaining). The hot spring real estate market in Seattle definitely helped! Had it appraised for the $600k I was expecting, I would not have been able to pull out as much equity initially, so market timing benefited me.
Here are the numbers from the refi:
- New loan principle balance: $500,000
- Origination fee: $5000
- Other closing costs: $2,413.78
- Cash Back: $112,614.73
Here are the summary of the numbers from this deal:
- Capital invested in property: $173,860.11
- Total investment capital left in property: ~$61,000 (including hard money interest costs)
- Hard Money Interest Paid: $16,659.20
- Cash Flow: ~$100 per door/per month
- Theoretical Equity Created: $214,000
To summarize, I now have an additional duplex in Seattle that I purchased and rehabbed using equity from two other properties (i.e. no new investment capital). On top of that, I only had to leave $61k of that equity in this property and now have over $100k of equity for additional investment(s). Next year, we will raise the rent – I opted for a lower than market rent to get the duplex rented quickly, and it worked. Both sides were leased up within 2 weeks of being listed. Over time the cash flow will improve on this property and I expect the value of the property will continue to rise given the close proximity to higher zoned areas and Seattle's housing shortage.
The plan will be to re-evaluate the equity in my three residential multi-family properties in 2-3 years to see if more equity needs to be re-purposed into other investments. Ideally, I will be able to pull the remaining $90k of initial investment capital out of this LLC within the next 2-3 years, making this LLC a ‘zero owner contribution' entity.
Key Lessons learned:
- My remodel budgeting needs work. I’m currently reading J Scott’s "Book onf Estimating Rehab Costs"
- It’s hard to block years of smoking odor and other nasty smells
- TSP was used to wash the walls and ceilings first; it got the grime off, but the smell stayed
- One coat of oil based Odor block paint may not be enough; I can’t really smell the smoke or smell anymore, but my wife’s super nose still can smell a slight odor.
I know this isn’t a cash flow cow; but cash flow isn’t my key objective currently as I have a full time job that pays well. I target investment properties from a growth and value point of view (with a big focus on value); that said my minimum requirement is that I net positive cash flow on each investment property. I only use the general rules of thumb from BP for initial evaluation; before I purchase a property, I conduct a detailed financial analysis with all costs, including appropriate monthly capital reserve hold-backs.
Kitchen Before:
Kitchen After:
Bathroom before:
Bathroom During:
Bathroom After:
Now it’s time to find my next investment!
