Deal #2 – First BRRRR and Partnership SFR

Overview:

Closed August 23, 2019

This was my first BRRRR deal and I learned a ton along the way. I found the property from direct mail, negotiated seller financing with low down, and then leveraged a partnership for the acquisition and rehab costs. I brought the deal and financing and they brought all the capital and project management. I was able to buy it at the right price and bring in partners who have a lot more experience rehabbing properties than me, so I left that part to them and was able to learn from along the way. I asked what probably got to be an annoying amount of questions along the way but I soaked up a bunch of information on rehabbing houses. This one was particularly interesting because it was a full renovation on a post-Hurricane Michael home. It was damaged in the hurricane and then mostly left alone after that, so there were many mold-related issues that we ran into during the rehab. We went over budget on the rehab due to all of the unexpected issues we found in the house. Though we expected the project to be a much bigger return, it still worked out and I got all of my partner’s capital back. When I refinanced I paid my partner back in full plus their return and now fully own a solid rental property that rents well. As you can see, this is a real representation – not a home run story of how I am the best investor ever. That’s what this blog is about, sharing the vulnerable moments and mistakes that when taken as a learning lesson make us all better and get us towards our goal quicker.

The Numbers:

Purchase: $53,250

Financing: Seller financing at 6% interest, with $3k down, a 10 year balloon, and 30 year amortization.

Closing Costs: $1,400

Repairs: $88,000. This one got out of hand. We found a lot of issues along the way to include, wood rot, termite damage, plumbing issues. The result was we ended up doing a full gut and renovation on a 1,900 square foot house so the costs crept up and the labor costs were very inflated because of post hurricane demand.

Total Out of Pocket: $850 for the marketing costs, survey, and some miscellaneous

Refinance: $150,000

My Return: Infinite

Cash flow: $200/month

Updated Jan 2020:

I placed a long term renter (my first) in this property in under 3 weeks in January. I thoroughly screened and found a tenant who is in the Air Force and who had great credit and references. I screened through dozens of potential tenants who didn’t meet my criteria and stuck to my screening criteria. So far the result has been dependable bi-monthly rental income – which means I collect an extra rent payment each year!

On a negative note, I did find out the house has cloth wiring and that it costs twice as much to insure it. My insurance dropped me because of the wiring and I didn’t know why. Then I found out, after some research, that cloth wiring is a fire hazard. It is wiring wrapped in cloth (hence) the name, and was standard in the late 50’s and early 60’s when this house was built. The home inspector glossed over this during the inspection after the rehab, and the insurance company’s inspector caught it on their initial inspection. Now I pay twice as much for insurance and am saving all the rental income to replace that wiring. Not an investment killer, but costs me $100 each month in cash flow.

Lessons Learned

  • Working with partners – This was my first rehab project and luckily I had partners who had done it before. They also had done partnerships before and guided me through the process and paperwork of establishing the responsibilities of each partner. This is one of those situations where you want to be sure to pick the right people up front because they could have taken advantage of my ignorance but instead they helped me learn along the way and now we have done several deals together.
  • Screening tenants, marketing vacancies, signing a lease, move-in inspection, new tenant orientation – All of these things came out of The Book on Managing Rental Properties by Brandon and Heather Turner and Landlording on Autopilot by Mike Butler. These two books helped tremendously and with the proper diligence upfront in learning the process it made actually going through it much easier.
  • Estimating Rehab Costs – I wish I would have read J Scott’s Book on Estimating Rehab Costs before doing this project. I think I would have been able to avoid a lot of the mistakes if I had read that book first. We had to redo work several times because of things the contractors messed up, which I feel was my fault because I did not learn beforehand. But in the end it still worked out, maybe not like we would have hoped but we came out okay.
  • Get a thorough home inspection – Even walk the house with the inspection because it is not worth it, I lost ⅓ out my cash flow and it will cost more down the road to re-wire. Now I will have to remove a section of drywall all throughout the house to get to the wiring. It would have been a lot cheaper to replace when all of the walls were out.
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