A BRRRR is Worth all the Stress
I want to dedicate this blog to detail my recent BRRRR project (which was pretty stressful and heart pumping). My goal is to show how fast moving real estate investing can be, and how much time and effort is utilized to execute a deal.
If you are new to real estate investing or have not stumbled upon my Instagram @house_hustle, you may be unfamiliar with the BRRRR strategy. Simply, the acronym BRRRR stands for B (Buy), R (Rehab), R (Rent), R (Refinance) and R (Repeat).
The purpose of the BRRRR strategy is to acquire as many investment properties as you can using the same funds you started with, all by pulling out the equity as cash from the property and then repeating that same process over again with the cash you pulled out.
Let me break down the BRRRR process first before I dive into this specific deal.
(B)uy: purchase a distressed property at a low enough discount so you can add value by making repairs.
(R)ehab: Rehabbing a distressed house will add value and force it to appreciate.
(R)ent: You want to rent the house out so that your tenant will now pay down your new mortgage and expenses, leaving you with positive cash flow after reserves. Ideally, you would want to rent the property for at least 1.3-1.5% of the ALL IN project cost. For example, if the cost to purchase + rehab the house is $100,000, you would want rent to be at least $1300/month.
(R)efinance: The cash out refinance is the part where you have the least control. In order to pull ALL your money out of the deal, the appraised value after rehab should leave about 25-30% of equity in the deal.
(R)epeat: Once you have successfully pulled out all/most of your cash from the cash out refinance, you can take that same cash and use it to buy your next property!
Day by Day Breakdown
It was the end of July and I just finished rehab of my last BRRRR property in Memphis and waiting for it to get rented. I have about $55K cash sitting on that deal until November 24th when I can cash it all out.
Secondly, in June, I also put another property in North Carolina under contract, but was waiting on the seller to move out of her house and the deal was delayed until mid August. Which means I had time to purchase another property, which would put me at 3 BRRRR deals in the span of 3 months.
I reached out to my awesome realtor in Kansas and told her that I was on the hunt again. Just a few days later, she sends me a property that was listed for $35,000. The property was just on the market for 1 day, so it was fresh off the MLS. It was a 2 bedroom 1 bathroom in a decent side of town. We had to act fast.
The turn of events for the next 10 days was the MOST stressful I've had.
July 31 - Property listed on the MLS for $35,000, realtor sends me listing. It is a story home (2 bedroom/1 bath), built in 1900 with new roof and HVAC installed in 2011.
August 1 - Realtor visits property and sends me video walk through. She tells me there is enough room to make it a 3 bedroom and 1.5 bath. Which would of course increase the value of the house and allow me to rent it for higher. I confirmed rent to be $1000 for a 3/1.5.
August 1 - We submitted a cash offer for $30,000 that same night to expire at noon the next day (contingent on inspection).
August 2 - (sometimes in the morning)- Seller counters at $33,000.
August 2 - (noon) - I countered at $32,500 to expire at noon the next day. I'm thinking that the entire rehab to add bedroom and half bath plus all new cosmetic items should cost $35,000 or less. Anything more and I'm backing out.
August 3 - Offer accepted for $32,500 (7 day inspection contingency starts)
August 5 - Wired $1000 earnest money to escrow.
August 5 - I sent an inspector out for a full home inspection + termite inspection (this is very important! Most savvy investors do not even bother with inspections, but for me, I think it is worth the peace of mind and proper due diligence).
August 6 - Inspection report comes back and there are no major surprises, no mold, no termites, no foundation issues. We are good to go.
August 6 -I finalize a rehab scope of work based on pictures and my inspector's report. I really wanted a half bath upstairs because who wants 2 bathroom downstairs?
August 6 - I send my contractor out (this contractor worked on my last project). He calls me and tells me that he CANNOT add the half bath upstairs, as the downstairs plumbing is too far away to add the bath upstairs since it's in the opposite side of the house. He says he can add the half bath downstairs. His final bid was $45,000. Now, I'm freaking out. I'm thinking he is either trying to rip me off or it is really that expensive to add a half bath! I tell him I can't pay more than $35K. He says he will get back to me with better numbers.
August 6 - I scramble to find more contractors to come out and give me a bid. I emailed/texted/Facebook messaged about 12 contractors in the area. 7 contractors returned my message and they all said they will come out and give me a bid. Only 5 actually showed.
August 7 - Contractor #2 arrives at the property, he tells me he cannot add a half bath upstairs as the crawl space is too narrow. But if I do want a half bath upstairs, it will cost me $15,000 to reroute all the plumbing. I also wanted some walls removed downstairs to create an open living concept. He tells me that it will cost me $3000 a hour to get a structural engineer out there. He returns his final bid at $38,000 (without the half bath and without the walls removed). I'm freaking out again!
August 7 - Now I'm seriously stressed. I have 3 more days to get a rehab bid in that will make this deal work, or else I need to back out or I lose my $1000 earnest money deposit.
August 8 - Contractor #3 arrives at the property, said he cannot put a bath upstairs, but he can do a cosmetic rehab (New floors, paint, new bath etc) - his bid comes back at $32,000. BUT this is without the half bath or the 3rd bedroom and no mention of walls being removed. I'm freaking out again.
August 8 - Contractor #1 gets back to me with his final bid of $35K (wow, he was totally ripping me off the first time!). His new bid did not include the half bath upstairs as he says it is not possible. I scratch him off my list.
August 8 - Contractor #4 arrives, he says he CAN put a half bath upstairs!! And he can remove some walls! And he can add a 3rd bedroom! I'm ecstatic! However, he says has no place to stay since the location is 45 minutes away and he would like to stay at the property as he works on it and asked me if he can bring his dog to live with him. WTH?? I'm hesitant because he is the only contractor that actually can get these things done. I wait for his bid.
August 9 - LAST DAY before my inspection contingency expires. Contractor #5 comes out and says YES, he can easily add the half bath upstairs, he can easily remove the walls downstairs and add the third bedroom. He returns a bid of $38,000 including material/labor. I'm saved!!! But when I looked at his bid on the paint and flooring, they were astronomical! I decided to use him to do the work on the half bath/wall removals/bedroom addition, and decided to get a handyman to install the vinyl flooring and paint.
August 9 - Contractor/handyman #6 comes out. I asked that they bid on the floors/paint ONLY, and also for them to add a white picket fence. Their bid comes back ~ $16K including material and labor. I am happy with their bid!
August 9 - I emailed contractor #5 and tell him to remove the bid for the paint/flooring and only give me a bid for the rest of the project. He reduces his bid to $19K.
August 9 - Contractor #4 comes back (this is the one that wanted to live at my property with his dog) - $58,000 was his bid. I tell him he's out of his mind and that I have decided to go with another crew.
August 9 - Closed on the property in North Carolina - Wired $66,540 to close on the deal. Rehab started. (Will detail this deal in another blog post)
August 10 - Inspection contingency ends. I finalized my rehab bid from 2 different contractors (totaling $35K). I send my realtor a message telling her that I am not backing out and we are cleared to close!
August 12 - I send the rehab bid from my 2 contractors to title and have them put the rehab invoice on the HUD/settlement statement.
August 12 - I texted my lender for the cash out refinance that I am about to close on another property and need him to approve my settlement statement so it can be ready for the cash out refinance.
August 16 - Title company sends me my draft HUD. I email it to my lender. He approves.
August 21 - I wired the full amount $32,500 (purchase)+ $35,000 (rehab) + closing costs = totaling ~ $68K to escrow. I closed on the property.
August 21 - I emailed my PM to let them know that I closed on the property and I would like them to visit the property to suggest repairs. PM picks up keys at Title office.
August 23 - PM tells me that the property should rent for $1000 once property is fully rehabbed. I tell them that I wanted it marketed for $1050, they agree. They also set up bi-monthly lawn maintenance for me.
August 26 - I turned on all utilities and placed it in my name.
August 28 - Rehab begins. Contractors picks up first draw checks at title office to start project.
October 1 - PM lists property on website as "coming soon". Many interested prospects.
October 10 - We have 3 approved applicants!!
October 15 - Rehab completes, PM changes locks, final cleaning
October 16 - Appraisal ordered by lender
October 23 - Appraiser visits property
October 25 - $62K cash out from the North Carolina BRRRR *Cha Ching*!!
October 28 - Appraisal comes back as $100,000!!
October 28 - Tenant moves in, utilities taken out of my name. $1050/month, 1 year lease.
October 31 - Cash out refinance closes, $68,324 back in my bank.
November 1 - Ready to buy the next property!
**Total $130K cash back in my bank from the 2 BRRRR spanning 2 months**
Before the Rehab
Rented for $1050
Appraised at $100,000
Pulled out $68,324 cash
$320/month positive cash flow after all expenses and reserves
After The Rehab
Photos courtesy for Hauspics
I think this is my best BRRRR to date! I got all my money back and just had to spend less than $3000 in overage in rehab costs+holding fees. The property also rented super fast and had an applicant even before the rehab was completed! Not too shabby right?
I look at it as if I bought this house with just <$3000 of my own cash and now it brings me a little over $320/month in positive cash flow!
I'm also in love with how the entire rehab turned out, especially with the extensive scope that I had planned for it.
My stress level was through the roof, but thanks to my calm and logical husband, I made it through the first 10 days.
Looking back, it was all worth it!
Help me understand something…you pay cash for everything and then you take out a loan for ~$68K as a refinance, and take that cash and do it all over again? Why not just take the monthly rent and save it for a few years and do it again? How many of these tiny mortgages do you have? What would happen if you didn’t have a tenant?
Wow, that was such an amazing read! It t was very enjoyable to read and I learned quite a bit of BRRRR.
Lol. I thought it would be boring because it’s a subject I am not familiar with. But it had drama, funny moments (contractor 4 and his dog), easy to read, good writing, and very personable. I liked the break down of numbers which made the entire investment project easy to understand and follow. The final thoughts were very good too because of teachable lessons to learn from (contactor 1/previous contractor). Very good and enjoyable article Julie! Lol.
Hi Adam, those are great questions. 1. Yes, that is correct I pay cash for all projects. 2. Doing the BRRRR strategy I can accumulate assets much faster vs. paying it all down and having to save again for several years to get another one. 3. I have 7 rentals, 6 mortgages, I own one of my rentals free and clear. 4. If I didn’t have a tenant, I would pay the bills while I go and find another tenant. Normal vacancy is around 1-2 months. Part of the cash flow from rents is put away for future vacancy to prepare for this situation. To minimize this risk, I perform my due diligence and invest in good neighborhoods that have strong rental demand. In the unlikely doomsday scenario where all seven of my rentals become vacant all at the same time, I have enough cash flow from being an optometrist to cover as needed. I hope this helps answers your questions!