Deal #9 – BRRRR’bnb to Financial Freedom Number

Overview:

This property is It is what I like to call a BRRRR’bnb, which is BRRRRing a property that will be an Airbnb rental. And for those who may not know, BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat and simply refers to the steps in order to purchase a property, fix it up, get it rented out, refinance to pull your cash back out, and recycling that same cash into the next deal – and Voila’.

I was already doing this exact strategy, but I first heard the name put to it by another investor out of North Carolina, so I can’t claim all the credit. Simply put: BRRRR’bnb is awesome.

I like this deal a lot because it almost didn’t happen, it presented a lot of challenges, but at the end of the day it will put me over my financial freedom number – which for me was replacing my living expenses. This is also the property that will push my gross real estate income over my gross Air Force income which is  an exciting milestone. And all of this in only a year since buying our first property.

The property itself fits with what we have developed as our little niche – a main house with a second rentable unit, in this case a detached apartment, that we will rent on Airbnb as a “Super Listing”, or in other words, three listings in one. The main house is a listing. The detached apartment is a listing. And both units combined are a listing. They are all linked so if one books it blocks off the corresponding linked listing. For example: If the whole place books as one, it blocks off the two smaller listings for those dates and if one of the smaller listing books, it blocks off the whole place for those dates. We have found success with this type of listing in our market because we can get in at the price of a single family home (and even lower because we buy homes that need rehab) and get two rentable units. Guests love them because we are the affordable, homey option still close enough to the beach and amenities.

It’s also the first deal that, once listed, will be completely professionally managed. I have managed myself up to this point but doubling my units all at once while expanding into the multifamily space has proved to test my limits in a lot of areas – so Nicole and I decided to off load all of our properties to property management so we can focus our efforts; her on getting her doctorate and me on growing our portfolio rather than getting caught in the weeds managing our current portfolio.

We did experience a setback that caused this project to be delayed 8 weeks. The contractor did not pull the electrical permit before doing the electrical work, and even then, did some of the electrical work incorrectly. This left us in a weird spot where my General Contractor (GC) had to hire another electrical contractor to pull the permit and do the remaining work correctly so that we could 1) get the property inspected so that we could 2) get certificate of occupancy to prove to the lender it’s livable and 3) get the power turned on so that we could 4) get the 4-point and wind mitigation inspection so that we can 5) get property insurance to 6) round this out to get the new loan and complete the BRRRR thus getting it rented and get our money out of the deal. So in conclusion of this little fiasco, we lost 8 weeks because of a contractor mistake which has caused us to lose 4-5 weeks of rental income.

To make matters worse the first appraisal came in at $195k, which means at 80% LTV we would have to leave $20k in the deal – more than I wanted to leave in. I ran my numbers based on a conservative ARV of $220k so I didn’t want to fall short by $25k. I imagine that I created this issue because I agreed to let the appraiser in the house before the project was completely finished. When he called to confirm the appointment I told him it was not quite ready because we still had a few building materials and random things scattered about but he assured me they wouldn’t be an issue. YEAH RIGHT! Lesson learned. Like it or not, the first impression of a property makes a big difference. I have heard stories of an appraiser stepping in dog poop during an appraisal and marking a property down by $20k! The little stuff matters with appraisals.

After I scheduled another appraisal, to my dismay it also came in low at a value of $200k. I read the appraisal report and analyzed what she compared the property to and did not feel like it accurately represented the value of the property. So I emailed her and respectfully challenged the data she used, especially when accounting for the value of the detached apartment. After providing her with further data, I asked that she would reconsider. Thankfully the added data (the square footage and build cost of the apartment) helped her to see that she had undervalued the property and she adjusted the appraisal up to $220k. At that value I could utilize an 80% LTV loan for $176k and get all of my money out of the deal – and that’s what I did.

Now the property is renting well as a short term rental and being managed by the property management company so my ongoing involvement is much lower. After all of the headaches and setbacks this property produced, it is finally up and running which now makes my monthly cash flow more than my W2 income and I have no money left in the deal. That is the beauty of BRRRR investing!

 

The Numbers:

Purchase: $78,000 with $1,000 assignment fee so $79,000 total.

Financing: Hard Money at 9.5% and 2 points up front. The lender provided 90% Loan to Cost (LTC) with the rehab costs coming in draws.

Financing Cost: $11,567.50

Down Payment: $12,032.08

Closing Costs: $3,577.42

Furnishing Costs: $3,788.40

Rehab Costs: $75,718.72

Wire Transfer Fees: $40

Survey: $595

Total Out of Pocket: $20,738.90

Refinance: Appraised at $220k, we refinanced at 80% LTV for $176k and got all of our money out of the deal

My Return on Investment: Infinite

 

Lessons Learned

  • Where do I start. The first would be to ensure that your contractor pulls the right permit. That mistake has easily cost me $5k so far because we could have got the property listed while high season for short term rentals was still in effect. Not to mention the time and headache it cost.
  • Make sure when you get an appraisal that you meet the appraiser at the property and that the property is in the most pristine condition it can be in. Impressions matter and can significantly impact your value.
  • Proper tracking of expenses. I lost some receipts along the way but did my best to keep track of every dollar spent and we are pretty close on the final budget. Because this is a short term rental I can front load my depreciation to recoup some of the costs spent on furnishing so keep track of what you spend in this case is very important (talk to your CPA for more info).
  • Speaking of the budget… include an overage expense. Rehabs hardly ever come out to what you expect them to be. Especially on big projects on older houses. We are currently 9% over budget because of random stuff that came up over the course of the rehab like extra roof sheets needing replaced, a plumbing leak on the main water line, and the project going longer than anticipated with the hard money interest rate accruing. The good thing is I budgeted for 10% overage because I am conservative so on my expense sheet its almost like a 1% bonus because I planned for a 10% decline. Being conservative is always the safe play.
  • If an appraisal comes in low, don’t be afraid to challenge the value (respectfully) with the Appraiser. The first appraisal came in at $200k which would have caused us to leave money in the deal. I emailed the Appraiser and gave her more data to use in adding the value for the detached apartment and was able to get an adjustment of $20k up to a new value of $220k, which allowed us to get all of our money out
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