Here's a recount of my first BRRRR (Buy- Renovate-Rent-Refinance-Repeat) deal with specific details/numbers. This post is long and detailed, but for those who spend the time to read through it, I hope it helps.
How did I found the deal:
I found this deal on the MLS. It was a foreclosure and soon after submitting my offer, I found out another investor outbid me. It wasn't until 2 weeks later, my agent informed me the original investors financing fell through and my offer was accepted.
The Property and Location:
The property is an oversized two family house right next to a major Hospital and University in Middletown, Ct. Unit 1 has 3BR 1B and Unit 2 has 3BR 1B with 2 large rooms in the finished attic. From a location standpoint, I was pretty familiar with the area and believed it would be sought after in 3-5 years. I have already started to see many restaurants and breweries popping up in town.
Financing:
Listing: $130k
Purchase Price: $118k
Financing: Hard Money Lender to fund 90% of the Purchase Price, 90% of the renovations for 3pts and 11.5% interest for 12 months no prepayment penalty. I had only done 2 prior deals (no flips) so the rate was slightly higher.
Rehab Budget: $30k
ARV (estimate): $215k
Rent (estimate): $2,800
- Scope of work:
Convert Unit 2 from electric to gas heat. Unit 1 had already been converted so I knew gas lines were in place. - Install new on demand hot water system for 2nd
floor unit.
- Install Luxury Vinyl Plank flooring (LVP) throughout both units (Home Decorators Collection Blue Cedar Grey from Home Depot)
- Install new counter tops and cabinets in 2nd
floor kitchen
- New Vanity/shower for 2nd floor unit
- Install 3 new windows
- Install Sump pump in basement
- Update washer dryer hooks (each unit)
- Paint all ceilings/walls/ trim ( Agreeable Grey from Sherman Williams)
- New appliances for 2nd floor kitchen (used from Facebook Market Place)
Holding Costs: $8,271
- 4 months of $1,284 interest only payments
- Taxes
- Utilities
- 6 months Builders Risk/General Liability Premium
After all said and done I spent $28,397 (not included holding costs) and was under budget!
Rent:
I was able to rent the top unit for $1,400 and the bottom unit for $1,375 totaling $2,775.
Refinance:
Because the renovation only took 3 months, I was looking for a lender who would refinance the deal without a seasoning period. After doing some research I came across a lender (found him here on Bigger Pockets) who would do a 75% cash out refi, 30 yr fixed @5.965% for 2.5pts, No seasoning.
When I originally financed the deal with the hard money lender I received two appraisals. The first was an as is appraisal for $120k. It also included a projected appraisal (including the scope of my work) for $220k (5k higher than my ARV!!)
Unfortunately my REFI appraisal came back at $201,500- 17k under the projected appraisal.
My lender then agreed to change the terms to 80% LTV to make this work. Two days before closing they changed their mind and could no longer do the 80% LTV, only 75% LTV. They would not budge and did not let me dispute the appraisal so I ended up dropping them and starting my search over. Moreover, I ended up finding another lender who would finance 75% cash out, 1.5pts, 30 yr fixed at 6.6% no seasoning. Their appraisal it came back @ $200,500- 1k less than the original!!!! At this point I figured I was sh** out of luck and should just eat the difference. However, I ended up writing a very detailed letter to the appraiser explaining why I think certain comps should be used vs others and he ended up increasing the value to $205,000!!!.
So after all said and done here is was the numbers look like:
Hard Money Loan
Hard Money Loan Payoff: $134k
Cash into the deal: $24k (includes 10% down on loan, 10% of rehab costs, closing costs)
Refi: 75% of $205,000= $153,750
Cash out: $153,750- $135k(hard money pay off)= $18,750
Closing costs: $9k (escrowed taxes and Insurance)
Cash left in the deal= $14,250
- Math behind it: (18,750-9k)= $9,750 (24k-9,750) = $14,250
- In other words, I was able to walk with a check for $9,750 even though I received $18,750 cash out from the bank. After my initial investment of $24,000- $9750 (check) leaves me with $14,250 left in deal as mentioned above.
- The house could conservatively sell for $220,000 in its current state. If you were to put a traditional 20% down you would be $44,000 out of pocket w/o closing costs instead of $14,250. THAT is the power of the BRRRR.
Monthly Debt Service
PITI= $1,501
Income: $2,775
Monthly Cash flow before expenses: $774
What did I learn?
Always, Always, Always have a conservative ARV. The appraisal part of the process is the only part that is completely out of your control. Another human is determining your properties value and it is completely subjective. It still boggles my mind that we do not have a automatized system for appraisals yet.
Don’t be scared to fire your contractor at any point in the process. I would personally rather pay a higher rate for a contractor that does not eat up my time/money and can execute the job correctly.
I will most likely use the delayed financing technique described in the forums on my next BRRRR.
Trying to find a lender who does not require seasoning and still has a competitive rate proved to be a challenge
DO NOT let you emotions get the best of you. It's a business, treat it like one. If I didn't get so angry with my REFI lender who changed his terms from 80% LTV to 75% at the last minute- I would be left with a 30 yr fixed rate @5.96% instead of 6.6%.
It still costs money to complete the BRRRR. You need working capital and should have reserves for the unexpected.
What’s next?
I plan on holding onto this asset. Since completely the BRRRR process, I honestly think it is one of the best methods in REI to scale and build wealth. It is NOT a get reach quick scheme, but a way to have a cash flowing asset with all the deferred maintenance complete without having to put the traditional 20% down. I have since partnered with someone and purchased a 3 family. Our intention was to BRRRR but the lack of comps in the area have steered us towards a flip.
Please comment with your thoughts, tips, advice and stories.
