Helping my Friend with his First BRRRR: Part 1 The Analysis
For the past 2 months, I have been helping a good friend search for his first investment property. John currently resides in sunny Southern California and works a full time job. He initially became intrigued in investing in rental properties out of state for the advantage of passive income and wealth building. He reached out to me a couple months ago and expressed his interest in doing his first BRRRR project. Remember from my previous post that BRRRR stands for "Buy, Rehab, Rent, Refinance, Repeat."
His goal is to buy a distressed property with his own cash, rehab it to increase value, rent it out and then complete a cash out refinance to pull all his money back out. Always excited to help a friend start on the path towards financial independence, I happily obliged.
For those interested in learning more about the BRRRR strategy, check out my recent blog post: "A BRRR is Worth all the Stress"
At the beginning of the process, I introduced John to my team, which includes my realtor, contractor, property manager, lender and insurance broker. Remember, you simply cannot succeed consistently in this business without a talented team, and every team member is essential for the success of his investment.
As we began the process of identifying his first deal, I showed him how to quickly analyze potential properties and what red flags to look out for. Red flags include properties that have been on the market for months, and properties that have had multiple price reductions, as these things indicate the potential that something is problematic with the property.
Though properties with red flags may scare off a potential buyer, it should not be avoided as long as the numbers make sense. We did have a rule to avoid all properties that had major foundation issues, electrical/plumbing repairs or extensive mold; as these items can become very costly to fix.
Instead, we focused primarily on properties that are in a good part of town that require little cosmetic updates to increase the value of the house.
The next part of the blog will detail how we found the property as well as the rehab scope. Please keep in mind that John is the sole investor, and I did not purchase this property for myself, but screened and vetted the deal so that he could gain a greater understanding of the entire process.
Finding the Deal
We found this deal through our trusty realtor. It took about 1.5 months of searching to find this property. We looked at properties on the MLS and wholesaler
mailing lists.
Our strategy was simple: we focused on distressed single family homes that required some work to bring them up to market value, rent them out and then pull all the money back out through a cash out refinance.
Deal Criteria: It is critical to set very careful criteria when investing:
1) C or B class neighborhoods
2) Max all-in of $65K (including purchase and rehab)
3) All-in at most 75% of ARV (after-rehab value)
4) Rent to be at least 1.3-1.5% of all-in price
Easy right? Not really. Our realtor thought we were looking for unicorns.
Keep in mind, just because a property is priced low does not mean it’s a good deal; usually, it means there is something significantly wrong with the house. However, every once in a while, you stumble across a true diamond in the rough, which this property proved to be.
The Property
This property is a 2-bed, 1-bath home located in a decent part of town north of Kansas City. The property came on the MLS on 11/4/2019. We confirmed with the local property manager that it is a good area and looked at the photos and noticed that the property was in rent ready condition; hence, rehab should be minimal. We further confirmed the rent rate with our property manager to be around $800-$900/month.
The property was listed for $45,000. The seller’s agent informed our realtor that they have multiple offers and are accepting the highest and best offer the next day.
This is when my great team came into play. My contractor was able to provide a very detailed bid based on my realtor’s video walk through. After a few revisions, we finalized the bid at around $11,000. Our realtor predicts that after repairs, the property will be worth at least $80,000. Based on our calculations, we would like to be all in at most $60,000 (75% of $80K) to allow John to pull all or most of his money back out after the cash out refinance.
After some careful calculations, John decided to place his best and final offer at $46,000. Thanks to the diligent work of our team, on 11/09/2019, his offer was accepted!
The Rehab Scope
- New luxury vinyl plank throughout property
- Neutral gray interior paint on walls
- Install new shaker white kitchen cabinets and handles
- Install new subway tile backsplash
- New countertop with sink and faucet
- New bath vanity with faucet
- New carbon monoxide filters
- Install new gutters
- New blinds
- Patch/repair drywall and other miscellaneous items
Total Rehab $11,000
Prior to beginning any renovation project, it is important to consider the financial impact renovations can have on a property from a rental perspective as well as the appraisal prospective. Every renovation has to make financial sense. First, it is important to look at rentals in the area to understand market demands of local tenants. Secondly, property owners must understand and analyze how renovations may impact the overall value of the property as well.
To help answer our questions I reached out to my appraiser who recently appraised my last property. She was so kind to provide feedback on what improvements will add value and what will cost unnecessary money.
Prior to beginning any renovation project, it is important to consider the financial impact renovations can have on a property from a rental perspective as well as the appraisal prospective. Every renovation has to make financial sense. First, it is important to look at rentals in the area to understand market demands of local tenants. Secondly, property owners must understand and analyze how renovations may impact the overall value of the property as well.
To help answer our questions I reached out to my appraiser who recently appraised my last property. She was so kind to provide feedback on what improvements will add value and what will cost unnecessary money.
Out-dated Cabinets
The current cabinets are green and chipped. She advised that painting it a neutral gray or white color would add value to the house. We decided to replace the entire kitchen cabinets instead as the cost was just $300 more.
Out-dated, but functional kitchen appliances
My appraisal advised to keep the kitchen appliances if they are functioning since having new ones will not increase the value.
The overall condition of the home is great and the mechanicals of the home are fairly new. The roof is less than 10 years old and the HVAC and hot water tank are less than 5 years old. A professional home inspector determined the property to be in great shape, besides missing gutters.
John decided to ask the seller for a credit of $500 to help pay for the new gutter cost and much to our surprise, the seller agreed!
The Purchase
Purchase Price: $46,000
Closing Costs: $1500
Repairs: $11,000
Credit for gutters: (-) $500
Total Cash to Acquire property: $58,000
The Numbers
Buy: $46,000
Rehab: $11,000
Rent: $800-$900
Refinance: >$80K appraisal to pull all/most money back out
Repeat
What’s next?
John officially closed on the property on 11/22/2019 and rehab has begun! Immediately after closing, he transferred utilities to his name and added Builder’s Risk property insurance to protect from damages or theft that may occur during rehab.
The rehab is expected to be complete in 1 month provided that there are no weather delays. It is the beginning of winter time in Kansas and the roads can be icy and the temperature often dropping below freezing. One of the downfalls of investing in the Midwest is weather can cause unexpected delays from travel and contractors getting sick. Another is that finding a tenant can take a bit longer as most people do not look to move during the chilly winters.
We factored both scenarios into the plan and are fully aware of the risks and delays that this time of the year can incur.
I hope that you find this blog post helpful and informative. I will continue to update on the progress of the project, so please stay tuned and follow along on my IG stories @House-Hustle
Hello! Great article. I want to learn as well. I live closer to the Inland Empire, but grew up in Montebello, where my mother still lives. I and want to know if there are mentors like you or a course you recommend. I really want to learn but I’m scared! I don’t want to be taken and then disappointed/discouraged. Not that mistakes wont happen, but having a mentor would be reassuring.
Hello! Great article. I want to learn as well. I live closer to the Inland Empire, but grew up in Montebello, where my mother still lives. I and want to know if there are mentors like you or a course you recommend. I really want to learn but I’m scared! I don’t want to be taken and then disappointed/discouraged. Not that mistakes wont happen, but having a mentor would be reassuring.