All Forum Posts by: Kristian Conway

We are looking at a small farm that has an existing homestead. We plan to add-value to the existing home and live there but we are also looking at the possibility of selling building lots off the farm. We will only be in the area for two years with my wife's program so I'm not looking for a long term buy and hold.

Disclaimer, breaking up a farm goes against my upbringing and my grandfather would probably roll over in his grave. However, the property is right on the fringe of town and you can see the continued expansion of building lots toward the property. It has the potential to be a lucrative endeavor.  

My main questions lean towards the logistics of lotting off the farm land. Obviously survey work would have to take place to establish the lots but do you take it as far as building access roads, running utilities to each lot, etc. or do you simply say "Here it is and here's the price"? Or do you sell a chunk to a developer and let them handle it? Also, the property is on the edge of the city limits (literally the access road is the dividing line). What zoning/legal considerations should I take?

@Joseph Colliu I've experienced a similar issue with a duplex as well! My immediate thought goes to how much will your property be worth after you perform this rehab? 

Based on your purchase price and rehab estimate you will be all in at $135,000. With an LTV of 75% if it appraises for $180,000 you would be able to break even on your rehab. Of course, you would need it to appraise for more to cover your closing and holding costs but based on your number for price/sq.ft it sounds like your ARV will be more than $180k.

It's essentially using the BRRRR but slightly delayed. What I love about this use is you now have a better quality asset which results in less maintenance and higher quality tenants. BUT the money that you used to acquire this better asset (aka your rehab cash) is now redeployed into the next investment. So conceptually, I think it definitely makes sense to complete the rehab.

In practice, I would definitely reach out for additional quotes just to price check the contractor. This also gives you the opportunity to talk to more contractors, establish contacts, and learn the lingo. Working in construction myself, if they sense you don't know something 8/10 times they'll try and take advantage of that unfortunately. 

@Ronald Rohde The area is growing. There's a new apartment complex a few blocks away and they are breaking ground on another nearby. The property has a used car lot on onside, a small apartment building on the other and a duplex in front of it. All the apartments are C class properties and have a lot of C clientele that hang around outside. I'm pretty picky about area so this kinda turned me off of the property. 

@Henry Clark I appreciate the input, that's some great info! I also love the statement "Always make an offer if it has value." That's something that was eating at me honestly. 

@Aaron Linden Thanks for pitching in! What's the location of your property like? Also how do the tenants access the upstairs units? 

@Henry Clark That's some great advice! I hadn't even considered the possibility of contractor rentals but that is definitely something to think about! I know this has several variables but whats a good rule of thumb for a contractor rental? Do you charge by sq/ft or do you have another pricing convention? 

@Jon Kelly Thank you that's some great advice! 

@Natalie Schanne I appreciate the insight! I've never used one myself but that's super helpful and I can see how that would be an issue. The benefit you have of being centrally located can almost be entirely offset by the lack of viable access. 

I think I am going to pass on this individual property due to some of the factors we've discussed (elevator and size) but also due to the location and site logistics. The site it is located on is some what landlocked by other properties and would not be ideal for any other alternatives discussed. However, there's been some great ideas presented and I am definitely going to keep my eye out for a similar opportunity!

@Zach Quick It does have an old elevator but it would need replaced. That's another thing that I think may disqualify this property as even with an elevator that could be a headache for clients. I did try and be thoughtful in unit design and incorporate the large units on the first floor as you wouldn't want a couch on an elevator lol. 

Do you have a cutoff on amount of units that you deal with?

@Brandon Hicks This property has a brick exterior and a really solid shell so I don't think exterior doors would be feasible. That's a great idea and a great use of space though! Do you typically use that method on metal-sided structures? I'd love to connect and hear more about your properties!

@Zach Quick I was concerned about the size and amount of units. Whats an ideal size/number of units you would look for? However, I don't think finding buyers would be a huge issue as the site is centrally located in an urban area with a few new apartment complexes being built within walking/short drive distance. The units would all be interior units and I had planned to use a key fob system to provide access through one main door. I've included this cost in my rehab numbers as the access and security are high cost items but are also high priority of course. I would self-manage at first to work all the kinks out and then work in systems to remove myself from the process. 

So I've done residential real estate deals and seen some success. I work in construction, have done a lot of my own work and am a Civil Engineer by trade. In my hunt for another rental deal I stumbled upon an old warehouse for only $100,000. In my market, you can't buy any rental that's not in a rough neighborhood for less than approx. $150k. The building is two story with 4000 total sqft. I've always had a wild hair to convert an old building to loft style apartments but after analyzing the area and the necessary construction to convert I don't believe this is a viable option. 

HOWEVER, I thought of converting the property to mini self-storage. DISCLAIMER I have no experience in this field at all. I've never even rented a storage unit myself, only been to friends storage units. And I do understand the "stay in your lane" and "shiny object syndrome". However, I do believe it's worth pursuing even if it's just a learning exercise. 

So here's some rough numbers I came up with: 

$100,000 purchase (Definitely think I can get it cheaper)

4000 sqft space resulting in 3000 sqft usable rental space. (I worked up a layout of common storage unit sizes trying to keep a good mix of units) 

At 80% Occupancy I would be looking at roughly $2900 monthly rent. 

To convert the property it would take roughly $50,000. 

Property is zoned "Other Commercial". 

So I would be in the property $150,000 with a monthly rent of $2900. 

My biggest struggle right now is how to value the property to calculate Cap rate, etc. I typically utilize the BRRRR model on my residential property and have a very solid understanding of how to value the properties. On a property like this, I would still like to use the BRRRR model and pull my money back out but am unsure on how to value since it's so unique. I've also never dabbled in the commercial sector so I'm curious about the differences in financing as well.

Any help is appreciated! 

A Brief Introduction

We recently just completed a BRRRR deal on our primary residence in which we are also house hacking!

Location: Louisville, KY

Purchase Price: $145,000

Rehab Cost: $43,000

ARV: $265,000

Refi LTV: 75%

We purchased the property using an FHA loan and did a live-in rehab, doing about 90% of the work ourselves. Once part of the rehab was completed we rented two bedrooms out to roommates while we finished the remainder of the house. During the rehab, rental income was $1350 and the mortgage was $1100. Now that the rehab is completed the mortgage is now $1200 following the cash-out refinance.

We funded the deal using cash reserves and 0% APR Credit Cards (do not advise but will discuss further down).

What went wrong

The biggest drawback of this deal was that it took almost a whole year to complete. I travel for work so I could basically only work on the property on weekends. This put a halt on any other investing because all our capital and time was tied up in this deal for so long.

What Went Right

• The first thing that went right was the initial purchase. The house had been on the market for quite some time so we were able to get it for ~10k under asking price. The property was also located in a really great area of town that is highly sought after. It seemed that the property had been looked over by most investors because the listing pictures were really poor. I channeled my inner Brandon Turner and noticed that the house was listed as a 2 bed/3 bath but was almost 2000 sq. ft. so I knew that there was great potential for value-add. The house is now a 4 bed/3 bath and we were able to increase the value of the home by $115,000.

• Another thing that went right was the appraisal. I spent a ridiculous amount of time studying the local market and had a pretty good idea of where the property would appraise at. The appraisal came in $3,000 less than my estimated ARV. More seasoned investors may want to be closer than that but since this was my first time estimating ARV I was pretty excited being that close to the actual ARV. That validated that I had an idea of what I was doing and gave me some great experience and knowledge.

What I could have done better

There are two big lessons I learned from this deal:

• The Use of Hard Money: Before this deal, I had bought into the negative stigma of hard money and was afraid of it. However, as I observed how this deal shook out and did more thinking on the velocity of money and opportunity cost, I realized that it would have been a better option for this deal. We funded the deal with our own cash reserves and 0%-APR credit cards. The issues with this was that our capital was tied up in this deal for the entirety of the project. This halted all other investing; thus we have the opportunity cost of the deals we could have done and then the sluggish movement of our personal capital. Additionally, by using the 0% cards I did take a substantial hit on my credit score. Luckily, my credit before the project was very strong so I was able to weather the storm BUT if it hadn't been as strong, I very well could've been in trouble when it came to getting the refinance loan.

• Just because you can doesn’t mean you should. I’ve grown up in the construction industry and am a Civil Engineer by trade. Therefore, I do have a solid knowledge of construction and this project was a great development and test of my skills. Don’t get me wrong, it’s great to be on the other side of the deal and look back at how it turned out and realize you did that with your own two hands. HOWEVER, as an investor I realized it was smarter for me to use this knowledge to oversee the construction but to let someone else perform the work. Especially with me traveling for work I could only work on weekends and ran myself absolutely ragged trying to complete the deal. I got in my own way and this resulted in a year long project and virtually every dime of my own money in the deal.

So in hindset, I would have used a hard money loan to fund the initial purchase and rehab of the project and then completed the project in 3 months instead of 12. Probably a few less grey hairs as well lol. Yes, I did save myself a lot of money BUT I lost time and opportunity which in my opinion is worth more.

Conclusion

In conclusion, I am thrilled with how the deal turned out. One, we have a property in a great area that will continue to appreciate and will cash flow great. Two, we get the chance to live in a beautiful home (we plan to move out in the next year and hold the home as a rental) while having our mortgage paid down. Three, we made the improvements, forced $115,000 in appreciation, got our capital out of the deal AND made ~$10,000. Before bigger pockets I would have laughed at you if you told me that I could get paid to own the home and improve it. There were mistakes made and a lot of blood, sweat and tears but we weathered the storm and made it to the other side of the deal. We now have our capital back and are on to pursue the next deal.