All Forum Posts by: Karissa Sampson

After a few excellent BRRRRs in Boulder County, CO in the past few years I think I finally have a bit of a dud. Not the property itself but rather the circumstances. I would greatly appreciate anyones input as I am flying solo here and trying not to take too great of a loss.

Plan: BRRRR via SFH to up/down Duplex

Orig. Timeline: 6 months

Orig. lending: Traditional Primary Residence mortgage w/ 20% down which came from an $89,0000 HELOC with variable rate (9% currently) on my other home

Additional debts: $55,0000 private loan from family member, $22,0000 on credit cards

Anticipated additional cost to complete the duplex conversion: $50,0000 in materials and labor, additional city requirements, and the actual permit

Challenges:

1. Permit: City permit office lost most of their staff and our application was given to someone else 6 months ago after we had nearly satisfied all the final requirements and the new staff member is requiring a whole new laundry list of requirements ($) and delays in issuing permits across the city because of staffing issues

2. Additional costs: I have run out of money. The lump of cash I had on hand has been spent on the project and the carrying costs have now consumed nearly all of my personal income  and real estate portfolio income cashflow

3. Time: Based on progress this far, the time I have available for the project, and delays with the city, I anticipate another 8-12 months

4. Although only my name is on the property and its mortgage, the project was started with my ex-fiance who was supposed to do the construction (thats his primary occupation) while I paid most of the costs. He has not kept up his end of the bargain for the past 15months and I am not confident he will for the remainder of the project. I do not have the money to pay someone else to finish the project and due to my job, I cannot commit to more than 1-2 days a week on the project. Its also not pleasant to interact with my ex and I would rather end this project as its the last thing keeping us interacting with each other.

5. The $55k from family member-they want it back with interest by the end of this year (in 3 months) ***this is a big one

6. The market..... I doubt mortgage rates are going to be lower or property values significantly higher anytime in the near future

So, the way I see it after running numbers the past two days, these are the options:

1. Finish the duplex conversion: No. Don't have the time, the money, the will to interact with my ex that much, or the risk appetite. Family member will not get their money back for at least another year which is unacceptable.

2. Finish it as a SFH and cash-out re-fi: I hold onto the asset for future equity and cashflow gains. I can payback family member their loan, pay off my credit card, but NOT be able to payoff my $89k HELOC since I will need to leave 20% in the property. It will break even monthly in year 1, likely start cashflowing in year 2+ by renting as a large SFH. Could always convert to duplex later when conditions are right. Family member gets their money back by the end of the year.

3. Finish it as a SFH and SELL: I already have the materials purchased to finish it as a SFH. Could get it done within 3 more months. Would have enough money to pay off all debts including my $89k HELOC or at least half of it (Sale price/market condition dependent) Family member gets their money back by the end of the year.

4. Sell as-is to an investor: I dont have to do any more labor or spend any more money. I'll get the least amount of money for it out of all the options. At best, it might pay 30% of my $89k HELOC in addition to paying off all other debts. Family member gets their money back by the end of the year. Fast. I actually had someone contact me yesterday and we did an initial walk through of the property. He's doing a 1031 exchange. We meet again next week to discuss details and potential offer.

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Number 3 would be ideal if I can sell it for enough to pay off the majority or all of my HELOC. I could break even on this whole situation and walk away.

Followed by #2 because I would retain the asset and it will cash flow soon, but I'll end up leaving that $89k in it for a long time since I used the cash-out refi to pay off other debts rather than roll my HELOC money forward to the next property.

Followed by #4 because I would get out of this whole situation fast but at the risk of having up to an $89k HELOC with nothing to show for it.

Of note, I do have another property with $160k of accessible equity in it. I cannot access it easily because I co own it with my ex who refused to cosign a loan to access the equity, I do not qualify for any additional personal mortgages such as a HELOC, and the rate is around 3.75% so I dont want to refinance the entire property at the current rates.

Overall my portfolio comes out in the positive even if I take an $89k loss on this HELOC for the curent property. It will also free up my personal income cashflow and rental cashflow again so I can start saving. I usually save up $60,0000 a year which I have been spending on REI projects the past few years. I could keep doing that or could pay off my HELOC within 1.5 years with that money. I have options basically.

So....any thoughts? I certainly am taking in as many lessons as I can from this project especially since its probably going to cost me a pretty penny for them.

Even something simpler like the small porch add-on in the navy/cedar house photo above would help uplift the face of the house. I also agree with the person above that sidewalk to wherever the driveway is would be nice too. Along with some landscaping around the house. Right now it just looks flat, plain, boring and cookie cutter. Like a house that a 4 year old would draw if I asked them. Good luck!

I personally find white houses with dark or natural wood accents to be gorgeous (especially with black framed windows) and navy colors are eye catching. Consider adding a porch or other structure off the front of the house to give the house more appeal and dimension. Here's some photos that inspired me when I saw your house:

About us: Used the BRRR strategy, have 5 doors in 3 properties with $300k in equity and $1800 cashflow per month. Started in 2020.

Bought a single family home in mid June 2022. Its zoned for use as SFR, duplex, triplex, fourplex, apartment etc. Its site use is SFR which requires a site plan waiver to change the use to a duplex. We plan to convert it form a large SFR to an up/down duplex. The numbers work as a SFR BRRRR, a SFR flip, a duplex and a triplex. Obviously the numbers are tighter as a SFR. Multiple assurances from the city that the zoning was correct, that the site plan waiver needed to be requested first (3-4 week turnaround time quoted), then the building permit could be requested (4-8 week turnaround time quoted), then we could start renovations. We wanted to be above-board and pull permits for everything and are now bogged down by the system with a potential for a 6 month delay before we can start the project. Part of me wishes we would just do most of the work and then file for the permits later down the line for the duplex conversion.

Site plan waiver submitted 7/1. Initially submitted as a request to convert to a triplex but amended to be a duplex due to costly building code requirements in our locale.

Site plan waiver DENIED 7/29. We were told that it seemed like a complex project and the planner wants to review it with us at a "Pre-Application Meeting" before anything moves forward. They wanted full drawings of the building, the lot, project description etc. We were out of the country and did not provide this until 8/30, a month later.

PreApplication Meeting approved on 9/7 for a meeting date of 10/26. Apparently 1 of the 2 people who do this work is out on long term medical leave due to an accident and they only hold the meetings on Wednesdays once a week.

10/26 is 4 months after we acquired the property. Assuming the Site Plan Waiver and Building permit timelines still apply after and *if* the project has approval to proceed, we are looking at late December to late January for starting the work. Potentially 6-7 months after acquiring the property. 

Its an older 1970s home and we started demo already (mostly removing wood paneling, drop ceiling, old carpet) so its not rentable as is. Mortgage payment is $2,580/month for a $15,480-18,060 holding cost for the 6-7 months until we can start work. We figured into our numbers a 6 month renovation timeline including holding cost, but now we are looking at the additional 4-6 months of renovation timeline to pay holding costs since we may not be able to start until the new year.

I know the short answer here is that we took on a large project, should have expected this and planned accordingly. However, I need to be financially savvy here and am looking for help. We have $70k in cash for the project right now.

Some thoughts I've had about how to proceed:

-Continue with the duplex conversion: Adds $200k in ARV. Cashflows $1,420/month. Plan to cash-out-refi if appropriate at the time the project is done. To accomplish the conversion: Cash out refi the duplex that has $300k equity or request more from an existing HELOC on another property, for enough money to get the new duplex conversion done. Could also work some extra shifts and earn the money for the different. Renovation estimate was $89k including holding cost of mortgage but now we may need up to $18k more given the prolonged permitting timelines.

-Ditch the duplex conversion and work as homeowner-as-contractor and renovate the SFR to rent out as one unit. Gains about $100k in the ARV and cash flows $300/month. Could file this permit right now without the pre-application meeting or the site plan waiver 4 week wait period and just wait the 4-8weeks for a permit. Costs less to renovate and project could be done faster

-File a permit now to renovate as a single family home or do it unpermitted. Get nearly everything done and then file for a duplex conversion later. Put the downstairs unit on a submeter with the hope that sometime it can be metered separately later. Keep the water on the same meter.

Thoughts? I feel like the answer is just to find the extra money and follow through on the initial plan.

The deal closed just fine in the end. I have a 50% stake in the partnership. Eventually found out that the IRS has to release the transcript direct to the bank so the fact that the lender waited until the last minute to request it thinking they'd get it turned around quickly makes me think they were just dragging their feet trying to find a way to not lend to me at the last second. The fact they asked me to obtain the transcript myself (which I've been told by a couple CPAs now is not possible given the other private info on the transcript from other partners), tells me they were either inexperienced in this arena or again, trying to let the lending fall thru. It was subject to financing. Ultimately I let the financing deadline pass which is on me at the end of the day. Should my lender have told me that "everything was set to close" verbally without having final UW approval and this in writing? No. Should my realtor have been paying better attention and given me the advice to nix the deal if the lender couldn't meet that deadline? Yes. I am still early on in my REI journey. Not a newbie, but still assembling my team and relying on my team for guidance in areas that I am still developing in. I believe in taking ownership so it comes down to the fact that I probably should have been even harder on the lender and/or withdrew from the deal by the deadline. Ultimately, it all worked out in the end just fine. Learned some inexpensive lessons which will help the next time around.

In the event someone else takes a look at this thread in the future and finds the updates helpful,

We had an HVAC tech and given the expense of adding all the ductwork for 3 separate units and having 3 separate systems (3 condensers, 3 furnaces, etc.) the much more affordable option was to go with 3 mini-split systems with cold-weather heat pumps since this is Colorado.

I'm happy with this option. Pros of the mini-split: Quiet, efficient, no ductwork to protrude into the downstairs unit's ceiling/less basement feeling, no fire-blocking shenanigans for the ductwork, and it performs both heating and cooling.

I have a duplex that has shared water (all other utilities are separated and tenants pay). I determined a flat rate to add to the rent each month based on last year's use/cost taking 12 months of bills, divided for a monthly average, rounded up to nearest whole number, and divided by number of people in the entire duplex. That gives you a per-person amount. You could do it per unit based on sqft or # of bedrooms too if you don't know how many people to plan for in the unit when advertising. This is for water though-sqft doesn't really affect it. For electric/gas, you'll need to factor sqft into the equation. Put in a clause about what happens if there is excessive use. Specify what is excessive use (X more than $dollar amount per month, or more than x gallons/month, or unreported maintenance) Unreported maintenance meaning that the tenant had water leaking and causing damage under the kitchen sink and they knew something was up but failed to report it and now you owe a ton of money for water bill (and repair damages). Spell out things like no window AC units, no plug in heaters, no swimming pools, no filling of RV tanks with water, no electric or gas use for business or commercial purposes (lest they setup their business in your garage and use your "free" electricity and gas to fund their business), etc. and put them in the lease. Make a good lease that spells things out in detail. Most people arent going to pay close attention to those details but they will mean a world of difference to you. In the event you have an issue, pull out the lease and "make the lease the bad guy" as Brandon Turner (I believe, maybe David Greene..) once said. 

Example (my own): Tenant's daughter left a garden hose running for a weekend. I received a water bill for $250 more than usual. I notified the tenant of the unusual high cost and that I was going to the property for an inspection to assess for leaks/causes. After finding no leaks, I noticed the garden was soggy and everywhere else was dry. I inquired and found out that the daughter had left the hose on. I brought out the lease and referenced the clause about this situation in it. I worked it out with the tenant to pay the excess $250 bill in smaller increments over the next 6 months. I had reserves to cover the cost and I like this long term tenant. I could have asked for the $250 upfront but knew that she would be more likely to pay it without argument or legal action if I spread it out over time. I am also lucky that she's a great tenant. A lesser tenant may tell you to fck off and refuse to pay, in which case you will need to keep security deposit, take them to court, or just eat the cost yourself.

Really advertise UTILITIES INCLUDED in everything you advertise. Tenants, in my experience, don't recognize the value of included utilities as much as we think or would like them to. They mostly focus on the per month rent cost. And if its higher (because of included utilities) than other local properties, they may pass on your property. They often see a cost of "$1800/month" (no util.included) vs. "$2,000/month" (util. included) at face value only and dont factor in that the $1800 is really $1800+cost of utilities. Stress to them also that having utilities included means that they don't have to deal with managing those additional bills each month/less stress. 

Curious-is this a legal duplex? The big thing for me was the lack of separate HVAC systems with shared ductwork. Ducts allow for fire to travel between units and usually a legal duplex is required to have separate systems. With electric heaters in the downstairs, consider the fire hazard risk if an absent minded tenant leaves it on unattended and something touches it and catches fire which introduces lots of potential problems. Does your downstairs have appropriate egress windows if its a basement? Can your tenants escape a fire? Is there fire blocking for the upstairs so the fire doesn't rapidly spread to their unit and they have time to escape a fire? Big picture- If its not a legal duplex and/or if your insurance is not for a duplex, then you may be at a huge loss and perhaps no coverage in the event a fire damages or destroys the property. If city finds out, they can shut it down and make you operate it as its actual use (ie: single family), may have fines too. Denver has been a hot market and people have been advertising properties as multifamily which are NOT legally multifamily (ie: SFR, SFR w/ legal ADU, SFR w/ illegal ADU, etc.)

If its is illegal and you plan to rent it anyways, make sure its safe for the tenants and you've thought about the risks. Also, be careful in talking to the city to find out if it is a legal duplex because you could bring attention to yourself if youre just going to rent it anyways.

If its legal-sweet, congrats on a legal duplex in Denver and I hope you get the utilities figured out.

Anyways-long winded answer. Hope it helps.

So, I ended up polling some friends about the AC and most said they would pay more for central AC and would reconsider renting a place without it. I'll probably install it now while the renos going on.

Replace it. I buy gentle used appliances that are only a few years old for a few hundred bucks. Fridges are expensive to repair and a pain.