Investment Info:
Small multi-family (2-4 units) buy & hold investment.
Purchase price: $245,000
Cash invested: $55,000
This is a duplex on 51st & Dodge St. in Omaha, right in the heart of Dundee. Other than being located on a busy street, this is about as prime of a location as you can get. The units are huge:- 3 beds, 2 baths and over 2000 sft on each side. One side was vacant and needed a lot of work, the other side was dated and under-rented at $1200.
The duplex was brought to us by a broker as a pocket listing. The owner was distressed and was looking to sell the property as-is fairly quickly. He was asking $285,000, which we felt was too high for its condition. We made our best offer at $245,000, cash, with a fast closing. The owner countered a couple of times, but we stuck to our original offer and ended up being too far apart. About a month goes by, and we get a call from the broker asking us if our offer was still good. We said yes, and she asks if we can close in 3 days. "Uh, what? Why?" I say. Apparently, the owner was about to be foreclosed on and did not bother informing anyone about it, and now we were 4 days away from the auction.
We scramble and our title company comes through with getting the property closed. Literally the day before closing, in one of our lovely -10 degree Omaha February days, the furnace goes out in the occupied unit. Normally, this would be the responsibility of the current owner, but he does not have the money to pay for the furnace. So we cough up $4,000 to get the furnace replaced. Negative $4K before we even own the place - off to a good start!
Once we get closed, we begin on the rehab on the vacant unit. It turns out beautifully. Our property manager begins marketing the unit for rent while we begin the appraisal portion of the BRRRR process. We order an "as completed" appraisal from a small local bank so that we can recoup all of our rehab costs plus extra for remodeling the other side once the current tenants' lease expires. The unit ends up renting for $2,120 per month plus utilities, and the appraisal comes back at $400,000. Boom!
We bought the property on our line of credit originally, then refinanced with a separate lender to maximize the amount of money we could take out to get all of our money out, plus extra. More often than not, if you use the same lender as your line of credit, they will likely use the "loan to cost" approach vs. "loan to value". This is a key difference, and why we went with a different lender for the refi.
We are excited to own this property in such a great location. The cherry on top is that it cashflows and we have none of our own money in the deal.
What made you interested in investing in this type of deal?
BRRRR's are one of my favorite strategies to build wealth. None of my own money in the deal, cashflow and appreciation.
How did you find this deal and how did you negotiate it?
It was a pocket listing that a broker brought to us.
How did you finance this deal?
It was purchased using a line of credit, then rolled off of the LOC after refinancing at a different bank.
How did you add value to the deal?
We replaced furnaces, gutted the kitchen, full repaint throughout the interior and refinished the hardwood floors.
What was the outcome?
We refinanced at 85% LTV on a $400K appraisal, so leaving a $340K note at 5% interest and a 20 year amortization. We are going to use the extra $40K from the refi to remodel the other unit once the lease is up.
Lessons learned? Challenges?
This was a little challenging because of Covid-19. Most appraisals ground to a halt, so it was difficult for us to get the appraisal turned around quickly, but it got done within a month. We were concerned the pandemic was going to negatively affect the valuation, but it came in right where we were hoping.
Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?
Amanda Zahm with PJ Morgan on the buy side. Kate McGann at Malvern Bank on the refinance. Melissa Sloboth at Missouri River Title on the closing.
