Deal Deep Dive | 4-Family BRRRR Investment Property | $0 Out of Pocket + $10,000 in Annual Cashflow
I'm going to do a BiggerPockets style deal deep dive into my 4-family investment property.
Today, I want to take a page out of the BiggerPockets Podcast and do a deal deep dive on my very first BRRRR Property.
The first question of the deal deep dive is: What Kind of Property is it?
The property I want to tell you about is a 4-family home in Camden County, NJ.
Each unit has 2 beds and 1 bath.
The property was fully occupied when we bought it and the monthly rent-roll was $3,600 per month.
It was in serious disrepair and needed a full renovation.
Fortunately, we didn't have to take it all the way down to the studs, but we did replace all the floors, kitchens, baths, doors, trim, the roof, as well as making some major upgrades to the electrical and plumbing.
The second question of the deal deep dive is: How did you find this deal?
The short answer is I found this deal through a wholesaler.
The long answer is a bit more interesting.
I follow the #BiggerPockets hashtag on Instagram and one day back in the Fall of 2019 I noticed a video walkthrough of a property I had previously considered buying.
I direct messaged the person that posted the video and within a week, we met for lunch at the local Chick-Fil-A.
After learning about each other's businesses, we had a good idea of how we could help each other grow.
A few months later, they sent me this deal and I jumped on it.
I offered the wholesaler an equity stake in the property if they helped me renovate it, rent it out, and manage the day-to-day operations.
They took me up on my offer and we continue to do new business together today.
The Third Question of the Deal Deep Dive is how did you negotiate the deal?
This property was originally presented to me by my wholesaler partner as an off-market deal for $310,000.
I ended up buying it for $240,000.
The $70,000 discount happened in two parts.
The first part was getting rid of the $20,000 assignment fee by offering the wholesaler a 25% equity stake in the property for helping me turn the asset around and ultimately manage the day-to-day.
The second part was a $50,000 seller concession after the inspection report came back. If you want to hear that story in detail, you can read my blog entitled: How to Ethically Negotiate on Price AFTER Your Initial Offer is Accepted
The Fourth question of the Deal Deep Dive is How did you fund the deal?
We funded the purchase with a mix of hard money and private money.
We used a hard money lender for 80% of the purchase price, which was roughly $200,000.
Our hard money lender charged us 1 point and 8% interest-only on a 1-year term.
We used a private money lender for the 20% down payment and the $160,000 renovation budget.
That made up another $200,000 loan amount, which cost us 10% interest-only on a 1-year term as well.
The good part about our private money loan was we only had to pay interest on the money that was drawn.
By the time we were fully deployed, we were paying a blended rate of 9% on $400,000, which equated to $3,000 per month.
Originally we wanted the property delivered vacant upon the sale.
However, having the property fully occupied turned out to be a blessing in disguise.
We used the rental income to service our debt and fixed expenses like property taxes and insurance.
Our renovation process took an entire year because we did one unit at a time.
We didn't force any tenants out of the property.
We let them leave at the end of their lease term, which happened to be evenly spread out throughout the year.
As soon as one tenant left, we renovated their unit and re-rented it within a 60-90 day window.
We never had more than one unit vacant at a time.
The Fifth Question of the Deal Deep Dive is What was the outcome - or- What did you end up doing with the property?
Going into this deal, our main priority was to complete a traditional BRRRR.
And that is exactly what we did.
We found a DSCR lender willing to lend 75% of the appraised value at 4.25% fixed for 30 years.
If you want me to introduce you to my lender, click the link in the description down below.
When we originally bought the property, we didn't have any solid comps to rely on so we conservatively estimated our ARV to be $500K based on a few duplexes that recently sold in the area.
However, a few months into the project, a perfect comp sold for $600K, so we were able to get appraised for $589,000.
If you want to hear this story in more detail: click the card above that links to another video titled: How To Add $189,000 of Value to Your First BRRRR Investment Property (No Prior Experience Required).
Anyway, we did a cash-out refinance for 75% of the appraised value and took a new loan for $441,000.
A little more than $400K of that went to pay off our hard and private money lenders.
We spent about $15K between closing costs and prepaids on the refi.
The rest of the money we kept in the business account as an emergency fund.
I like to keep 6 months of mortgage payments in the bank.
I think that's a healthy amount of reserves that can weather practically any storm.
When it's all said and done, we now have a cash-flowing asset with none of our own money in the deal.
For context, our total monthly rent-roll is $5295 and our PITI payment is $3,300 per month.
That leaves roughly $2,000 per month to cover all expenses.
Here are our major expenses:
The property manager takes 4% of the gross collected rent, which is roughly $210 per month.
We budget 8% for vacancy, which is roughly $425 per month.
And since we did a full renovation, we budget 10% per year for capex, repairs, and maintenance, which is roughly $530 per month.
After paying all expenses and debts, we expect our cash flow to be $835 per month or $10,000 per year.
The final question of the Deal Deep Dive is What major lessons were learned?
I had two major lessons from this investment.
The first lesson is leverage. From labor to capital, I tried to use as much leverage as I possibly could on this deal and it completely paid off.
In terms of labor, I went to visit this property once before buying it in the Fall of 2019 and I haven't seen it since then and I don't plan on ever seeing it again. I partnered with someone who not only has experience as a project manager for renovations but also has experience as a property manager for day-to-day operations. Owning this property is now a completely passive activity for me. I will probably spend less than 12 hours per year making decisions for this property until I decide to sell it.
In terms of capital, I financed 100% of this deal with hard and private money lenders. Once stabilized, I was able to pay off my lenders with long term fixed rate debt AND pull out some extra equity as reserves. Some people will say 100% financing is too risky, and typically I'd agree. However, I knew my numbers and I'm in the financial position to support this risk. If the rental income didn't cover the debt service or expenses in any given month, I could have backfilled the difference. Now that I own this asset with no money out of pocket, any returns are infinite and my downside risk is zero.
The second lesson is the importance of staying conservative and sticking to your numbers. In regards to the purchase - I almost walked away from this deal after some red flags in the inspection report. But the seller agreed to a price reduction that made my numbers work again. In regards to the refi, our appraisal came in almost 100K higher than our original estimate. This was the icing on the cake for this deal.