In 2021 I started my journey on the road of real estate investing (REI). I was living in Africa full-time and because of the COIVD situation I found myself with a plethora of free time on my hands. Between 2007 and 2021 I had only owned two homes and both of those were primary residences near Fort Gordon (now Eisenhower) in Augusta, Ga. One of the homes I sold in 2015 and the other my wife and I bought as our first home is 2007 and has been a rental property since 2011.
You could argue this property started our REI journey, but the truth is we didn't know how to analyze the market or the property. The rent we collected covered the Principal, Interest, Taxes, and Insurance (PITI) along with the Property Management cost (PITI-PM). All we knew was those costs were being covered by the tenant, so our costs were covered and maybe the property was gaining value.
I don't consider this my first investment property (although I still own it and it's performing much better after learning how to execute on REI). What I consider our first investment property is a duplex we purchased in Chattanooga, TN after many months of education, coaching and mentorship (thanks to Active Duty, Passive Income and REI Concierge). We decided on the Chattanooga market since my wife's entire family lives between Chattanooga and Knoxville, TN. We travel back to the area several times a year, plan to relocate to the area in future, and have sentimental ties to Chattanooga. My wife attended college in Chattanooga, and we were married in Chattanooga. In addition, one of my first mentors is from Chattanooga and has deep ties to vetted REI professionals in the area. Why create your own network when someone else already has one?
One of the first REI strategies I learned about and studied was the BRRRR method. From an investor standpoint, it made perfect sense to me. Buy (a property that needs some work), Rehab it (increase the value of the property), Rent it out, Refinance it (since it’s now worth more after the rehab), Repeat the process (since you are getting your capital back with the refinance). From an efficiency of money standpoint – it’s genius. In essence you’re using the same money repeatedly. If you’re doing it right, you are owning cash flowing rental properties for FREE (essentially). In theory it’s glorious – in execution it’s not so simple.
My agent in Chattanooga discovered this property while attending a continuing education class for realtors. She was speaking with another agent, one she knew well within her brokerage, and told him about a client who is looking for a duplex. He told my agent about a duplex he had under contract for $125,000 but was about to come off contract after the inspection. The seller planned to relist the property for $115,000. My agent sent me the off-market listing and provided the inspection report the previous buyer had paid for (saving me $600 on an inspection). After looking at the inspection report and listing (but not really knowing what I was doing) I sent an offer for $110,000. The seller accepted my offer, and we were off to due diligence!
The units in the duplex were not great but usable and had tenants. Each tenant was currently paying $650/mo per unit. A gross rent of $1300/mo on a property that only cost $110,000 was a steal at the time. Being in Africa provided some hurdles in terms of transferring money via wire transfer with my bank and having to mail power of attorney back to the U.S. in time for closing. Not going into those hurdles as they were situationally specific, and I want this to be more about the strategy and lessons learned.
Anyways, there were some needed repairs especially to the floor in one unit. I was aware of it from the inspection, but my general contractor (GC) stated the unit couldn’t be repaired with the tenant in place. The tenant did not want to vacate the property so if they were ok with the situation, they could stay. Until they wanted to vacate temporarily for the fix or vacate the property, they were welcome to stay. Everything appeared in order, so we closed.
Two days after closing, an inspector from the city contacted my property manager and told her the floors needed to be repaired or the city would place a lien on the property. The issues created a safety hazard for the tenants since it prevented a door from fully opening. Again, the tenants were adamant about staying and the property manager did her best to navigate the situation with the city letting them know we had every intention of correcting the issue as quickly as possible thus preventing a formal lien. Soon afterwards, the tenants in both units decided they were not paying their rent. This enacted eviction proceedings from the property manager.
Once the property was fully vacant it was time to execute the rehab. I hadn’t anticipated having to do this as quickly as a few months after purchasing. I was planning on saving the profits from the property and letting those contribute to the rehab once the tenant vacated. I realized I did not have the liquidity of capital for the cost of the rehab. I was able to get approval from my bank for a home renovation loan for the property. My GC went in and rehabbed the property updating flooring, painting, HVAC, roofing, appliances and other miscellaneous actions.
Once the rehab was complete, my property manager started marketing for tenants. Shortly after the listings were up, the city contacted my PM again. This time, they stated the property is not zoned for a duplex but is zoned for a single-family residence. We were not able to list separate units. My PM was lost as this was a situation she had never encountered before. I was ready to throw in the towel and just sell the property at this point, let it be someone else’s problem. Then I remember a quote I heard somewhere “ if you’re not creating problems to solve, are you even an entrepreneur?” ( I also credit this to politicians)
I dug deep into all the information I could find on the property. From the tax records, it had been zoned for a duplex in the past until 2015, when there was a big re-zoning project for the area. It now sits in a single-family residence zoned area. Next, I went through all my due diligence paperwork and sure enough, the warning signs were all there. I just didn’t know what I was looking at. I contacted the regional planning office for advice and process to request a change to the correct zoning. Luckily, everyone was super helpful with advice and assistance. I went through the rezoning process. It didn’t cost a lot of money, but it took a lot of time (about 4-5 months) to completion. My PM was able to lease the entire property to a single tenant who essentially sub-let the other unit to a friend, so we weren’t breaking the rules but was able to stop the money from bleeding out.
Once the tenant was in place and the zoning issue resolved, I went to refinance the property in 2022. At his point – here were the numbers…..
Purchase Price: $110,000 | PITI - $533/mo @ 4.1% | Loan balance: $82,000
Down Payment and closing costs: $35,000
Rehab Loan: $40,000 ($385/mo) | Rehab total: $46,500 ($6500 out of pocket)
Holding Costs: $5500
Total out of Pocket Capital: $47,000
The property rented for $1500/mo the first year. After PITI-PM costs the profit was $817/mo. After the rehab loan cost the property profit was $432. While it also doesn't account for reserves and other expenses – the entire property was just rehabbed so the costs were low. That's a rough profit of $5,184 the first year of ownership, 11% return on my investment of $48,000.
When the property was appraised for refinance, it was valued at $160,000. The bank would only provide 75% of the appraised value ($120,000). After loan payoff and closing costs, I would have recouped about $30,000 of my $47,000. But the cashflow after expenses would’ve been very small and the return would vanish. So, I decided to hold the property and revisit in a year.
In May 2023, my tenants renewed their lease at a higher rate. They’ve been great tenants and while the rates are below market, I would rather keep the tenants. I revisited the refinance option again. This time, the property was appraised for $182,000 (a 13% increase in value in only a year!). With the new valuation, the bank was willing to loan me up to $136,500.
After the original loan payback (which was less since the tenants had been paying it for me) and closing costs – the refinance would put nearly $39,000 back into my pocket. Add this to the cash flow from the property, and after one year I would recoup almost $45,000 of my initial $47,000. The property will still cash flow even after PITI – PM and the renovation loan costs.
I can now take the $45,000 and Repeat the process…albeit much more knowledgeable and cognizant of the pitfalls I could encounter.
