@Jackson Long Yeah, pre-qualification was done as soon as i selected the property.
@Jackson Long I went with Aaron Chapman who works with "Security national mortgage company" they were one of the few lenders still doing the delayed financing. As for my PM, im currently with Advantage property management.
I'm sure many of you can appreciate the blissful feeling of completing a deal. There is an unrivaled joy you feel from receiving the first rent check or when the funds from a flip/refinance finally enter your account. And now, at long last, I can partake in this wonderful feeling. After hours of research, phone calls, text messages, and emails; I finally did it: I completed my first BRRRR deal—well, almost. Unfortunately, I did leave some money on the table (more on this later). But first, let me give you some details on the deal.
I began searching for a property in mid to late April. The entire process from the beginning of my search to securing the funds from the refinance took about 4 months. There were a few other homes I made offers, or considered making offers, but they fell through. I didn’t zero in on this property until around the middle of May.
I purchased the property in Memphis Tennessee; in the Raleigh neighborhood to be exact. The house is a four bedroom two bath and it was listed for $52,000. The rehab estimate was approximately $9,400. This brought my entire upfront cost to approximately $61,400. As a result of the refinance, the closing costs were approximately $5,400. This would bring the entire costs to approximately $66,800. The ARV was between $85,000 and $95,000. Therefore, in order for me to recoup the upfront cost, the property would need to appraise for at least $89,067. The property was previously rented for $750-$775 two years prior. The current estimated rent was between $825-$850. In retrospect, it all seems so simple. But, as we all know, no deal is ever that simple.
There were many mistakes that I made while conducting this deal. There were many things that I could’ve done better, but I regret nothing. Each mistake was necessary precursor for me to learn essential lessons in real estate investing. I plan to implement these lessons in my future deals. With that said, let me walk you through what went wrong, what went right, and what I could have done better. It’s easier, but less rewarding, to look back and focus on everything you did right. There’s less opportunity for growth when you don’t take the time to learn from your mistakes.
When I first selected this property in May, our initial closing date was scheduled for June 1st. However, the seller held this property in LLC and it was not in compliance. So, the seller had to go through the process of bringing the LLC into compliance before the sale could be completed. This caused a six-week delay in the process. I must admit, this was extremely frustrating because I felt like I was frozen in time while everyone around me was out completing deals.
The initial rehab estimate did not reflect the final cost. I ended up spending approximately $10,400, rather than $9,400. During the initial walk through the contractor did miss a few items: wood rot underneath the house, a leaking sink, a few minor cosmetic issues regarding the bathtub, a leaking water heater, and a few other items. This increased my rehab costs. Luckily, I did aside contingency reserve in anticipation of this. Some of the other items were things that the PM and agent did not think were necessary repairs (whether they’re fixed or not would not affect the appraisal value). However, I chose to incur the cost because I plan to hold this property for the long term.
As I stated earlier, I needed the appraisal to come in at around $89k to recoup my upfront costs. Given the comps I looked at, and the expected rent, I thought this was achievable. However, the appraisal came in at a measly $80k. Thus, I was only able to recoup $60k (minus 5.4k closing costs). I did ask my lender to appeal the appraisal, but the appraiser would not budge from his initial estimate. I had the option of requesting a second appraisal from someone different, but I chose not to. I was unfamiliar with the process and unwilling to incur the cost of securing a second appraisal. Therefore, out of the $62.4k that I spent, I was only able to recoup $54.8k. Hence the almost BRRRR deal I mentioned earlier.
I know what I said earlier, but let me explain. The rehab estimate as to what was quoted, was in fact accurate. Nothing cost more than what I expected it to. In other words, if the scope of work said “rug removal: $500” then the final cost was $500 for that repair. The issue was that there were certain items that weren’t included in the initial scope of work that I chose to repair after the fact. So, in essence, the cost overruns I mentioned earlier were a result of my choice to preemptively make these repairs, rather than to rely on deferred maintenance. This might be a distinction without a difference, but I like to count it as a small win. Additionally, the time of completion for the repairs was exceptional. Even with the additional repairs, the repairs were completed ahead of schedule. And my agent and a subsequent property inspection verified that all the work was completed.
When choosing this property, I asked my PM and checked rentometer to forecast potential rent. I determined $825-$850 was appropriate. However, after seeing the renovations, reviewing comparable rentals, and comparing prior rents, I decided to list it for $895. Within the first week, we had 5-6 applicants. I also really enjoyed the tenant selection process.
My current PM gave me a more active role in the selection process than my other PM. She would screen the obvious rejections and present me with the most qualified candidates and present me with the pros and cons of each tenant. She brought up good points such as the industry of the potential tenant, and the risks that their job would be negatively impacted by a second wave a covid, work history, rental payment history, etc. After a few days of careful consideration, I selected a tenant who agreed to sign a two-year lease. At this point, it might be too early to determine whether signing a two-year lease is a good or bad thing. She paid her deposit a few weeks ago and is scheduled to move in at the end of this month.
I was also able to secure a great rate for the 30-year fixed: 3.99%. My mortgage payment will be approximately $451, with taxes and insurance. My PM charges 8%. The monthly cash flow will be approximately $372 (minus CapEx, vacancy etc). This equates to a 7% annual return on investment. Not a homerun by any means, but every dollar counts.
I currently live in NJ and the property is in Memphis. I don’t have a construction background, and I have full-time career. Therefore, I relied heavily on the contractors and PM to determine what needed to be fixed and how much it would cost. I should have taken more time in asking for a more detailed scope of work and auditing that scope of work. I wasn’t, and still am not, entirely confident in my ability to determine what needs to be fixed in a property in order to maximize the appraisal value. I probably fixed a few things that did not need to be fixed, and missed out on a few things I could have done that would have added more value to the home.
In retrospect, I should’ve researched the various appraisal methods and the most relevant factors used to reach an appraisal value. Additionally, I should have learned more about the appeal process and securing second appraisal. When I received the results of the appeal the lender told me I could request a second appraisal and she began to explain the process. However, at that point I just wanted to finish the deal and I had other things I was focused on. I should have been more patient and really weighed my options before accepting the appraisal. I could have walked away with more money in my pocket.
When I read the appraisers report, I noticed a few interesting things. The appraiser used the comparable sales approach and used 4 properties as comps. One of the comps was a 4/2 but the others were 3/2s. My property is a 4/2. However, in the report he listed my property as a 3/2. When I asked him about this he said that was a typo and conducted the appraisal as a 4/2. He also said that there aren’t many 4/2s available for comparison which is why he used the 3/2s. The report also mentioned that he did not use the income approach because there was insufficient data to make a comparison. However, he listed the estimated rent at $825. Despite the fact that I had a tenant that signed a two-year lease for $895. (tenant was secured prior to the appraisal). I supplied him with this information and I was told by the lender that the rent isn’t used for appraisal purposes.
Despite the long process, various setbacks, and numerous unknowns, I really enjoyed conducting this deal. Each mistake taught me an invaluable lesson that I plan on implementing in my future deals. My plan for the next deal is to fully execute the BRRRR. I don't want to settle for another almost BRRRR. To my fellow real-estate, I hope this post helps you in some small way. And if you made it this far into the post, then I’d like to thank you for reading.
@Sean Tagge that's the goal! Rehab should be finished up this week and we're listing it next week. Hopefully it rents quickly with a high-quality tenant.
@Chris Boselli thank you! I’m up for it. Once things start to ease up, let’s definitely plan to meet up. Hopefully in the next month or two. NJ is entering the next phase in lifting restrictions next week.
@Jeffrey Edwards thank you! My goal is to purchase at four more in the next 12 months
Below is a brief walk through of my journey in purchasing my second single family rental in Memphis, TN. I made plenty of mistakes when I made my first purchase, some of which I talk about in a prior post that can be found here:
https://www.biggerpockets.com/forums/12/topics/804517-hindsight-is-20-20-things-i-wish-i-did-better
I tried to learn from those mistakes. Although, I’m sure I still made some mistakes, I think I learned from those mistakes and improved my overall process. I hope this post helps others in avoiding the mistakes I made.
Brief Background regarding my Investment strategy: From the beginning I was looking to implement the BRRRR strategy. The property I purchased is a four bedroom, two bath in the Raleigh Neighborhood. The purchase price was $52,000. Rehab quote is approximately $9,500 and expected rent is between $875-950. I began my search late March, I put my offer in the first or second week of May and just closed on the property this week.
Lessons learned:
This time around I like to think I was better about selecting a property. One of my biggest takeaways from my first purchase was to scrutinize the rent the seller states the property could rent for. In my my first deal, I basically took the word of the turnkey company and did not check how much the property could rent for. This time around, in addition to checking with my own PM, I would cross reference the rent they suggested with what was advertised on Zillow, trulia, hotpads, other PM websites, and I would call various PM companies to ask what similarly sized homes in the given neighborhood rent for.
I also decided to cut out the middle man and work with an agent and contractor to purchase, renovate, and then rent a property rather than paying retail to the turnkey company. In my first deal, I looked up property records (after I bought it) and found that the turnkey paid 78k for the property and in turn sold it to me for 122k. I figured that equity would better be served in my pocket.
I also made it a point to not fall in love with the first deal I came across. In my first deal I looked at several properties and once I selected one, I got tunnel vision and was adamant to make that deal work—not that it was a terrible deal—but im sure with more patience, I could have found something even better.
Finding an Agent
I started with a quick google search that consisted of “investor friendly real estate agents in Memphis.” With that I was able to find a few agents and I began looking at their reviews. One agent in particular stuck out because, aside from his positive reviews, another investor-- @Chris Boselli--that I met here on BiggerPockets worked with him in the past and had a positive experience. After speaking with about half a dozen different agents, I decided to go with Tyler Tapley. Of all the agents that I spoke with, he was the most experienced in dealing with investors looking to implement the BRRRR strategy. At the time that we spoke, he had a network of property managers, contractors, title company, and closing attorneys. Basically, everything I was looking for to find and execute a deal. From the beginning, Tyler sent me numerous deals, which I vetted thoroughly. There were deals I sent him that he gave me his thoughts and opinions. After looking at many different homes, he brought me a deal I was excited about and I jumped on it. With each deal tyler sent me video walk through of the home and on the homes that showed additional interest in, he would send me comps to look over.
Finding a property management company
I currently have a property management company that I use for the first property I purchased. I wanted to work with a different company not because I was having issues with my property, but because I wanted to diversify a bit rather than rely entirely on one company. As I mentioned above, Tyler had a network of property management companies that he referred to me. He gave me a list of about 5 PMs and I began researching each one. My fiancé and I sat down and did the following: 1) made a pros and cons list for each company; 2) went on the better business bureau to read ratings and reviews; 3) read google reviews; 4) made a list of “interview questions”; 5) called each PM and interviewed them. After a few days, we made our decision.
We tried to do this early on because we wanted to leverage our PM’s knowledge of the neighborhood whenever Tyler presented us with a deal. Whenever Tyler would send us a deal, I would send it to the PM to get their input regarding potential rent, class of neighborhood, etc. This helped us eliminate numerous deals.
Finding a contractor
This portion of the process was lumped together with finding a property management company because the company we chose has an in-house contracting team that handles full rehabs. Once I had a property selected the contractors provided me with a rehab bid. Of all the deals, I found I only got a bid on two properties, and I only put an offer on those same two properties. The estimated time of completion for this rehab, as stated by the contractors, is 3 weeks. The rehab is set to start before the end of this week. (Fingers crossed that there are no unexpected hiccups). One thing I probably could have done better was obtain multiple bids from contractors. I was happy with the first bid I received and since the contractors work for the PM company I chose, I decided to forego obtaining multiple bids. Hopefully this doesn’t come to bite me in the future.
Finding a lender
This purchase was made in all cash. However, I was looking to refinance the home as soon as the rehab was done so that I could roll the cash out into the next deal. Tyler had two lenders he recommended. Of the two only one was doing the delayed financing. For the sake of completeness, I called about 8 other lenders and they all told me that I would not be able to refinance before the traditional 6-month seasoning period. However, one of the lenders that Tyler recommended said they are offering delayed financing and walked me through the process. Since I just closed on the property this week, the delayed financing hasn’t occurred yet. However, I started the loan application as soon as my offer on the property was accepted.
Submitting the offer and closing the deal.
I offered the amount listed because I felt like it was a fair deal. After looking at comps in the area, cross referencing the listed price with the tax appraiser's records (list price lower than tax appraiser), comparing the amount the prior owner paid with the amount it was listed for (seller paid more when they purchased), I decided to submit an offer at asking price. My offer was accepted without issue. However, the seller had an issue with their LLC. Apparently, the LLC was not in compliance and they had to pay various fees, submit paperwork to gain compliance. It delayed the closing by about 3 weeks. I started to think the deal wasn't going to go through. Luckily the title company and Tyler both had experience dealing with this type of issue and reassured me that it's not uncommon and typically simple to resolve, it's just a matter of time.
Next Stages
For those familiar with the BRRRR strategy, you realize I still have quite a few more steps to complete before I can say this was successful deal. The rehab is set to start later this week and should be completed in the second or third week of july.
Since we’re in the summer time now and with the school year around the corner, I’m hoping a tenant will soon follow. I’m happy how this deal has gone so far. I’m excited to start my search for the next deal. Although I would like to have my tenant in place before making any offers. Stay tuned for another update! I’d love to hear any feedback, insight, or tips from anyone.
Below is a brief walk through of my journey in purchasing my second single family rental in Memphis, TN. I made plenty of mistakes when I made my first purchase, some of which I talk about in a prior post that can be found here:
https://www.biggerpockets.com/forums/12/topics/804517-hindsight-is-20-20-things-i-wish-i-did-better
I tried to learn from those mistakes. Although, I’m sure I still made some mistakes, I think I learned from those mistakes and improved my overall process. I hope this post helps others in avoiding the mistakes I made.
Brief Background regarding my Investment strategy: From the beginning I was looking to implement the BRRRR strategy. The property I purchased is a four bedroom, two bath in the Raleigh Neighborhood. The purchase price was $52,000. Rehab quote is approximately $9,500 and expected rent is between $875-950. I began my search late March, I put my offer in the first or second week of May and just closed on the property this week.
Lessons learned:
This time around I like to think I was better about selecting a property. One of my biggest takeaways from my first purchase was to scrutinize the rent the seller states the property could rent for. In my my first deal, I basically took the word of the turnkey company and did not check how much the property could rent for. This time around, in addition to checking with my own PM, I would cross reference the rent they suggested with what was advertised on Zillow, trulia, hotpads, other PM websites, and I would call various PM companies to ask what similarly sized homes in the given neighborhood rent for.
I also decided to cut out the middle man and work with an agent and contractor to purchase, renovate, and then rent a property rather than paying retail to the turnkey company. In my first deal, I looked up property records (after I bought it) and found that the turnkey paid 78k for the property and in turn sold it to me for 122k. I figured that equity would better be served in my pocket.
I also made it a point to not fall in love with the first deal I came across. In my first deal I looked at several properties and once I selected one, I got tunnel vision and was adamant to make that deal work—not that it was a terrible deal—but im sure with more patience, I could have found something even better.
Finding an Agent
I started with a quick google search that consisted of “investor friendly real estate agents in Memphis.” With that I was able to find a few agents and I began looking at their reviews. One agent in particular stuck out because, aside from his positive reviews, another investor-- @Chris Boselli--that I met here on BiggerPockets worked with him in the past and had a positive experience. After speaking with about half a dozen different agents, I decided to go with Tyler Tapley. Of all the agents that I spoke with, he was the most experienced in dealing with investors looking to implement the BRRRR strategy. At the time that we spoke, he had a network of property managers, contractors, title company, and closing attorneys. Basically, everything I was looking for to find and execute a deal. From the beginning, Tyler sent me numerous deals, which I vetted thoroughly. There were deals I sent him that he gave me his thoughts and opinions. After looking at many different homes, he brought me a deal I was excited about and I jumped on it. With each deal tyler sent me video walk through of the home and on the homes that showed additional interest in, he would send me comps to look over.
Finding a property management company
I currently have a property management company that I use for the first property I purchased. I wanted to work with a different company not because I was having issues with my property, but because I wanted to diversify a bit rather than rely entirely on one company. As I mentioned above, Tyler had a network of property management companies that he referred to me. He gave me a list of about 5 PMs and I began researching each one. My fiancé and I sat down and did the following: 1) made a pros and cons list for each company; 2) went on the better business bureau to read ratings and reviews; 3) read google reviews; 4) made a list of “interview questions”; 5) called each PM and interviewed them. After a few days, we made our decision.
We tried to do this early on because we wanted to leverage our PM’s knowledge of the neighborhood whenever Tyler presented us with a deal. Whenever Tyler would send us a deal, I would send it to the PM to get their input regarding potential rent, class of neighborhood, etc. This helped us eliminate numerous deals.
Finding a contractor
This portion of the process was lumped together with finding a property management company because the company we chose has an in-house contracting team that handles full rehabs. Once I had a property selected the contractors provided me with a rehab bid. Of all the deals, I found I only got a bid on two properties, and I only put an offer on those same two properties. The estimated time of completion for this rehab, as stated by the contractors, is 3 weeks. The rehab is set to start before the end of this week. (Fingers crossed that there are no unexpected hiccups). One thing I probably could have done better was obtain multiple bids from contractors. I was happy with the first bid I received and since the contractors work for the PM company I chose, I decided to forego obtaining multiple bids. Hopefully this doesn’t come to bite me in the future.
Finding a lender
This purchase was made in all cash. However, I was looking to refinance the home as soon as the rehab was done so that I could roll the cash out into the next deal. Tyler had two lenders he recommended. Of the two only one was doing the delayed financing. For the sake of completeness, I called about 8 other lenders and they all told me that I would not be able to refinance before the traditional 6-month seasoning period. However, one of the lenders that Tyler recommended said they are offering delayed financing and walked me through the process. Since I just closed on the property this week, the delayed financing hasn’t occurred yet. However, I started the loan application as soon as my offer on the property was accepted.
Submitting the offer and closing the deal.
I offered the amount listed because I felt like it was a fair deal. After looking at comps in the area, cross referencing the listed price with the tax appraiser's records (list price lower than tax appraiser), comparing the amount the prior owner paid with the amount it was listed for (seller paid more when they purchased), I decided to submit an offer at asking price. My offer was accepted without issue. However, the seller had an issue with their LLC. Apparently, the LLC was not in compliance and they had to pay various fees, submit paperwork to gain compliance. It delayed the closing by about 3 weeks. I started to think the deal wasn't going to go through. Luckily the title company and Tyler both had experience dealing with this type of issue and reassured me that it's not uncommon and typically simple to resolve, it's just a matter of time.
Next Stages
For those familiar with the BRRRR strategy, you realize I still have quite a few more steps to complete before I can say this was successful deal. The rehab is set to start later this week and should be completed in the second or third week of july.
Since we’re in the summer time now and with the school year around the corner, I’m hoping a tenant will soon follow. I’m happy how this deal has gone so far. I’m excited to start my search for the next deal. Although I would like to have my tenant in place before making any offers. Stay tuned for another update! I’d love to hear any feedback, insight, or tips from anyone.
@Alex Craig @Curt Davis What are your thoughts on 38128 zip code, specifically on kerwood ave?