OK BP, I'm looking for a little advice here on our BRRRR. My wife and I purchased our first rental property in March and we are still trying to make it profitable. We purchased a building for $11,500 that has two one bedroom apartments and one studio, but the city zoned it as a two unit building so we cannot rent out the studio. The building is 100 years old and needed just about everything fixed and updated. Purchasing a building that was so poorly cared for has certainly come with lots of problems, feel free to check out my previous posts.
We started getting work done on the exterior like roof, windows, exterior paint, new doors, railing for the stairs… Some things are coming in below budget, and some over budget like the roof needed all new wood under the shingles. At the start, we had $30,000 to invest so we haven’t used any credit yet, but we are about to. The two inherited renters have been signed to one year leases, until March of next year, the third tenant had to move out because we could not legally rent to him. The rents are $500 and $450. They are below market value, but need to be rehabbed. As we start to use credit to pay for rehab, we plan to pay back any credit we use once we take out a mortgage on the building. Originally, we planned to spend a year using the money made from rent to rehab the exterior and common fixtures, and not touch the units themselves until the year lease is up and the current tenants move out. I didn’t think we would find lenders who would lend on a new appraisal versus the sale price of the building until we owned it for a year anyways. Well, I started calling local “small” banks and the first three that I called all said they would gladly lend on a new appraisal right away, no need to wait.
I would like to finish the building now, take out a mortgage, pay off any credit we have used so far and see what we have left to start our next project, but here is my dilemma. I believe I would have to update everything including the units to get the building to appraise where I need it. To do that I would need to use a lot of credit. The first bit of credit is a HELOC on our primary residence, so that is cheap, no problem there. That will still not be enough money to get everything done so we would need to use credit cards and that gets very expensive. Also, because our renters are paying below market value, it would be harder to pay the mortgage. I am impatient and want to hurry up and move on to the next project, but since I singed the current renters to a year lease, I think we are going to have to wait and follow our original plan. Anyone have any thoughts? By the way I think we are going to finish the empty studio, furnish it and list it on Airbnb as a room with a bathroom, not an apartment. Anyone have any thoughts on the legality of that? I appreciate any advice!
Thanks for the kind words @Robin Boyer we are still struggling. Even though we bought at a low price, the project is huge and we have so many questions that still need to be answered. We signed the two tenants to one year leases so we cannot raise any rent until at least March 2018. We had a new roof put on the building and of course it needed all new wood under the shingles so that went over budget. We are still waiting for the new windows and hope that they do not go over budget. We did have another thought about what to do with that studio apartment that we cannot rent out because Peoria says it is a 2 unit building. We are thinking about furnishing and listing it on airbnb as a room for rent, not an apartment. I really don't feel like I can offer any advice because I haven't proved anything yet. We are still afraid that we are putting all of this money into the building and it will not appraise for enough. Because we live near Chicago, any local lender that I spoke to will not lend on such a low value building so we were afraid that we will not be able to get a mortgage on the building. I started calling small, Peoria banks and had much better luck. If you buy in an area much less expensive than where you live, look for financing in the area where you buy. I was able to lower our insurance cost. Our insurance company had us on a policy for $134 a month and I had to keep going back again and again for them to try to find a less expensive policy and finally did. We are now paying only $84 a month. All of our bills have come down. The first month we thought we are going to go under because everything was priced way over our estimates. The first month we collected $950 in rent and had to pay just over $800 in bills. That was just insurance, electric, gas, water and sewer. We thought, "that's it, we're in trouble" but the bills have come way down. In June, our bills totaled just over $400. So don't be surprised when it feels like everyone is trying to steal from you, in fact plan for everything to go way over budget and it is our job to work to lower those bills. Best of luck to you and we'll keep it up here. Thanks
I should have mentioned that we paid all cash. This building has a ton of deferred maintenance. The purchase price was less than a third of our rehab estimate. We waived the final inspection because we just figured it needs everything. We did not have an appraisal.
I am not saying we are doing this correctly, so don't take my word for it. We have not done anything to block out the third unit yet. In fact, we have not yet taken down the mailbox or changed the apartment numbers (Unit #2 was the smallest, so he was the one that had to move out.)
The electric has four meters. One for the building and one for each unit. When we contacted the electric company, we just took over the building and the extra apartment.
The building is 150 miles from our house so we are currently using the extra apartment as a janitor's closet and plan to put a bed in it so we can stay there for weekends.
Hi Aksel,
I am brand new at this. On March 1st, we just closed on our first investment property, similar to your situation. We were about 20 hours away from closing on a 3 unit building when we got a call from our broker informing us that the seller could only get the building zoned as a 2 unit. We had to renegotiate the price, much lower. The building does not cash flow as well, but it was still a good deal, so we bought. I hope that we can have it rezoned as a 3 unit, but if not, we still have a decent money maker.
Randolph Roanoke and yes, it's 100 years old
My wife and I purchased our first investment property on March 1st, 2017. It is an ambiguous sized apartment building (2 or 3 units) with tenants in place that needs a ton of work. Here are some of the numbers:
Purchase: $11,500
Current monthly rent for unit 1: $500
Current monthly rent for unit 2: $450
Monthly average gas + electric: $137
Monthly estimate for water + waste: $85
Monthly insurance: $134
Yearly taxes: $1700
Total rehab estimate: $35,000 - $40,000
Once the rehab is complete, I believe we will be able to raise the rent:
Unit 1, converted into a 2 bed, 1 ½ bath: $625
Unit 2: $525
Our story starts with our desire for financial security in retirement. We believe that if we can purchase some rental properties, once we retire we can continue to receive money every month with little work on our part. We talked about purchasing an apartment building or two for many years, but in the middle of last year we decided it was time to take some action. We live in the information age, so education is easy to find. I started by googling real estate education where I found bigger pockets. I started to watch webinars, listen to podcasts and at Brandon Turner's suggestion I have been taking out audio books at the library and listening to them on the way back and forth to work, and I went to a couple of local real estate investor meetings. As we got closer to actually make a purchase, we took some money out of our retirement account , created an LLC and opened up a bank account in that name. We plan to build the business until we retire. We do not plan on taking any money out for ourselves for many years. I should also note that because we took money out of our retirement account before we hit retirement age, we have to pay a huge penalty and income tax on that withdraw. We plan to pay that tax bill with our personal income from our jobs by squeezing our budget a little tighter. As we fumble our way through this first investment property, we are making a ton of mistakes, but I feel like we are learning a lot and that education is priceless. Now I will get more specifically into the deal, but please keep in mind that we are idiots and have made mistake after mistake.
My wife and I decided that we wanted to do our first deal all cash to reduce our risk. We live near Chicago and with the small amount of money that we had to invest, we could not find any deals that we could complete with all cash, at least not without buying in an area where I would be afraid to walk. I found some areas with lower priced houses in less dangerous neighborhoods within driving distance. Our budget dictated that we look at single family homes and I decided to look in the Peoria Illinois area because I felt there were enough jobs and opportunity in the area. The distance is an issue, it is 150 miles each way, but I said that I am not going to let a 2 hour and 15 minute drive stop me from finding something that can work. Decision made, Peoria it is.
We secured a home equity line of credit on our primary residence of $17,500 just for the sake of emergencies. We do not plan on touching it, but I wanted to be able to spend our money without having to keep some in reserve. So, with an "all in" budget of $30,000 that does not include our emergency HELOC, I contacted a broker on Zillow to show me some houses under $25,000. For the next 2 months I looked at houses in the entire Peoria area once or twice a week. I would drive out there and meet our broker, sometimes alone, sometimes with my wife and a couple of times with my brother in law, who has contractor/construction experience. One issue is that even though I explained to the broker that we wanted to find something that we could buy cheap, fix up and force equity into, she kept taking us to houses that have already been flipped by previous investors, so there was no room for forced equity. I started to give her a list of addresses that I wanted to see and she would only be able to get us into about half of them. When we found a possible deal, I would calculate everything on the bigger pockets BRRRR calculator and decide on a price that we would be willing to pay. We got about 4 or 5 rejections before we got an acceptance email. It was a run down, single family home that needed everything listed for $22000. We offered $12000 and my wife and I freaked out when we got the email from our broker that the seller is accepting our offer. "WOOHOO! We did it!" for about 3 minutes until our broker called us and said that it was a short sale. We didn't want to wait for an answer from the bank so we pulled our offer and went back to the drawing board. On one of our trips to see houses, things started to look better for us. One of the addresses that I wanted to see had a pending offer so we couldn't see it, but after we finished our list for the day and about to drive back home the broker said the pending offer on the Armstrong house is questionable. Do you want to go see it before you leave, and I said yes. While at the Armstrong house a man walked in to close a window and said to the broker that he has the pending offer and he is buying the house. As he walked out to his truck our broker told me that he is a local investor. I ran out the door and followed him to his truck, thrust my hand out and said "Hi, my name is Bob." Meeting this local investor was probably the best thing for us. We became friends and we learned a lot about the area. At one point he showed us a building for sale and told us it is a house that has been converted to a 3 unit building listed for $40,000, but you could probably get it for like $20,000, the three units rent for $500, $450 and $350 a month with tenants in place. The 100 year old building was ugly and needed a ton of work, but "it's a cash cow." It is in a questionable neighborhood, but certainly not the worst and they recently bought two buildings within a one block radius, one duplex and one house that they plan on moving into themselves. I went home and crunched some numbers and contacted our new broker (referred by our new investor friend) and made an offer of $17,000 without even going into the building. Our thought was that we could buy the building even though we do not have enough money left for repairs. We would keep all three tenants and fix it up as we go. Our new broker suggested that we waive the final inspection and close quickly as an incentive for the seller to accept such a low offer, so we did. We also asked the broker to get us in to see the building as soon as possible. The seller and I negotiated back and forth and decided on a final price of $18,400, we scheduled to close on January 11th. Shortly after the final price was agreed upon, we finally got in to see the inside of the building. The inside looked at least as bad as the outside. Everything was run down, broken or simply non-existent, like no bathroom door for apartment 1. The biggest issue we noticed was there was no heat. Here it was late December and the tenants told us there has been no heat since October. The seller stopped taking care of this building a long time ago. Scheduled to close on the building January 11th, I started to schedule repairs and services like gas, electric and water. I had a heating company come in and check out the furnace and hired him to replace it on the same day that we were scheduled to close. I thought “the minute it is my building, my tenants will have heat!” I kept building my rehab plan until about 14 hours before we were supposed to close. At that time I got a phone call from our broker who said we cannot close on the building tomorrow. The seller never got a zoning certificate from the city of Peoria and the last time one was issued, 15 years ago, it was zoned as a 2-unit, not a 3-unit building. The seller had to apply for a zoning certificate so we had to wait. I had to pay a restocking fee for the furnace that I ordered and had to cancel other rehab plans and services. About a month later, the zoning certificate came in from Peoria as a 2-unit building. As a 3-unit building, it is a cash cow, but zoned as a 2-unit it is much less profitable. Also, we would have to convert the 1 bedroom, 1 bath apartment, plus the studio apartment into a 2 bedroom, 1 ½ bath apartment. I had to renegotiate the price with the seller and we eventually decided upon $11,500 with the stipulation that the seller had to clear out the third unit before we closed. We scheduled to close on March 1st and this time I resisted the urge to set up any kind of repairs until we actually took ownership. On March 1st, I drove out to Peoria to close on the building. The seller and his wife showed up 15 minutes late and we were all smiles during introductions until the closer at the title company showed the seller the dollar amount of his check. When he saw how little money he was actually walking away with, he started to freak out. He questioned the deduction for taxes, he questioned the broker fees and at one point he turned to me and said “young man, can’t we renegotiate this?” Of course, I said no, we already negotiated. The seller and his wife had to have a private conference so I waited in the room with my broker while they discussed. They came back in and the wife said they will accept the low check amount because they don’t want me to have driven all the way from Chicago for nothing. I asked the sellers how they will forward the tenants’ security deposits to me, and they said they have already given them back to the tenants when their leases expired, many months ago. I assumed they were lying but I wanted to get this done and own this building. We completed the closing and with keys in hand, I drove over to the building to have a conversation with the tenants and see what condition the third tenant left the room in. The answer you may have guessed is, they didn’t leave the room at all. I took some time and spoke to all three tenants and explained my plans for the repairs and told the third tenant the he needed to move out. He gave me “OK, I’ll look for another place and I’ll let you know when I can move out.” I did the cash for keys thing and agreed to pay him $300 if he can move out within 2 weeks. I did notice that the building now has heat. I found out later that the third tenant called the city and complained of no heat, forcing the seller to fix it. When I finally got home on March 1st, I sent an email to the company who sets up all of our utilities. Thursday morning, I got a phone call from one of my brand new tenants to tell me “they shut off the water again.” I contacted the water company and they said I will need to prove the building was sold by emailing them the closing documents, then the water will be turned back on within three days. I had them with me, so I did so right away. I was back at the building on Saturday and Sunday and still there was no water. My wife and I bought gallons and bottles of water for all 3 tenants so they could at least have a drink and brush their teeth. Monday morning I was back on the phone with the water company who said they never received the closing documents so I need to send them again, I did. On Thursday I got another phone call from a tenant saying that the building has a letter from Peoria posted on it that the building will be condemned and there is still no water. I called the water company again and explained all that has happened. They simply said they have received no documents from me even though I have them in my “sent” folder, they will not expedite turning the water back on unless I pay the seller’s unpaid bill plus an additional fee. They suggested that I simply email them the closing documents and wait. I insisted they give me an alternative to email because that obviously doesn’t work. They said I could fax them or walk them into their local office. I planned to do both, but once I faxed them, I got a phone call from them to set up our new account and turn on the water. I then called the inspector from Peoria who was threatening to condemn the building and explained that the water is back on now so he said they will not condemn the building.
At this point I had contacted a painting company for exterior paint, a tree service to cut down an ominous tree and pest control to spray for bugs. I also started to plan the work I would do on my own, or with help from my brother in law. Shortly after I scheduled a painter to paint the entire exterior in early June, I received a letter from the city of Peoria. I have been summoned to court because our building is in need of exterior paint. I called the inspector who sent me the summons and he said to call him again closer to our court date and he will grant an extension to give us time to get the building painted.
About 2 weeks after our purchase, we finally got the third tenant moved out but he left his mattress leaned up against the garbage can, so we had to deal with that. We signed the other two tenants to one year leases and I collected rent for the first time in my life and I must say it was a pretty good feeling. I went to a local bank, easy walking distance from the building, to set up an account so our tenants can walk up and just deposit my rent every month, but could not get it set up. The first time I walked in without any paperwork and they said I need some certificate from the city to do business in our company name instead of our own. I went home and remembered the LLC paperwork that I needed to set up our main business account, so I went back to the same bank with paperwork in hand. I spoke to the same banker, she looked at the paperwork and said no, I still needed to walk over to the city courthouse to obtain the certificate. I did exactly that, I walked over to the courthouse, explained what I was trying to do and I was told no, you do not get that certificate from here. You must contact the state government to get that. My next step to get this account opened is to walk into a different branch with my LLC paperwork and see if I can find someone who knows how to get this done because the banker I have been talking to does not.
We are still struggling with this adventure. We will continue to go there on weekends to work on the repairs that we can do. We will continue to try to educate ourselves and learn how to navigate the problems that we find. We have the help of my brother in law, the experienced and talented carpenter and the valuable help of successful local investors who have become our friends. Most of all, we have our passion and perseverance to overcome any obstacle we encounter. We believe that we will make money with this building. It will take us a year or two to complete all of our repairs and upgrades, but at that time I believe we will be able to take out every penny we put in with a mortgage. We will have a cashflow property, money to put into our next project and lots of valuable education and experience.
Wish us luck!
occupied when we took ownership. The rent they are paying is a little low, so I believe we will be able to raise rent once rehabbed, but it is nice to keep money coming in while we work on it.
Great story! Thanks for sharing. I am in the middle of my first BRRRR. We purchased March 1st. We are in the process of repairs while keeping tenants in place. Once we can take out a mortgage, we hope to do any where near as well as you. You are an inspiration.
Thanks
My parents own a small cheap house in the moon lake area in New Port Richey Florida that they rented out for like 15 years. They want to sell it because they don't want to take care of it anymore. Can anyone recommend a good listing broker who can help them get the best deal for their property?
Thanks for the replies James and Brie. I don't have the numbers in front of me, I am actually at my real job being unproductive. Our accepted offer was $18,400 all cash. All three leases $450, $400 and $300 have expired. Although we do not have the $20,000 it will take to do the entire rehab, I believe it would be easy enough to borrow. The more I think about it, I think we will want to kick everyone out, rehab then find new, good renters. As I mentioned, we won't close until middle of January, so we have some time to think.
thanks