Where we've been. Where we're at. Where we're going.
BRRRR Deal Analysis
A walkthrough following a standard deal lifecycle
The goal of this deal walkthrough is to provide an idea for what a realistic BRRRR deal may look like. The word realistic will depend on the investor, their criteria and the market. Some investors will be more concerned with pulling out their initial capital and be okay with a cash flow neutral property. We prefer looking at cash flow and cash-on-cash rather than recovering the all-in. I’ll walk through the entire BRRRR process and finally review performance and learnings.
The goal of this deal walkthrough is to provide an idea for what a realistic BRRRR deal may look like. The word realistic will depend on the investor, their criteria and the market. Some investors will be more concerned with pulling out their initial capital and be okay with a cash flow neutral property. We prefer looking at cash flow and cash-on-cash rather than recovering the all-in. I’ll walk through the entire BRRRR process and finally review performance and learnings.
If you’re not familiar with BRRRR, it has likely been a real estate investing strategy since the mortgage industry started. It was finally given the “sexy” acronym by Brandon Turner and simplified and made accessible by David Green in his book, Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental. This BiggerPockets article by David Greene is a good starting point but both Kat and I highly recommend the book.
By the end of this post, I aim to educate and encourage you to take the first steps into the real estate investing world. You may have different investment criteria compared to us but it’s a diverse market with a niche for everyone.
BiggerPockets Glossary of Terms.
Timeline
Overall, the project lasted 6 months. Typically, a conventional loan will require a 6 month seasoning period before you can refinance. We have since discovered ways around this requirement. I’ll list some numbers below and will go in depth in the following sections.
11/16/19: Listed for $45,000 (FSBO) 11/17/19: Pending 12/02/19: Purchased for $37,000 | |----: Rehab for $28,000, All in for around $68k | 02/15/20: Listed for $970/mo 04/07/20: Rented 04/24/20: Appraised at $79,000 05/20/21: Listed for $1,100/mo 05/27/21: Rented 06/03/21: Refinanced at 75% LTV, 30 yrs at 4%. Monthly $283
B · uy
We had been looking for properties in the neighborhood as we liked the rent to price ratio and rental demographic. Prior to the listing, we were already familiar with expected rents and after market value (ARV) for properties in the area. This allowed us to quickly run numbers and come up with an immediate “go” or “no go” decision.
Listed
When this deal was listed, we immediately had our agent at the property the same day. From her walkthrough, we didn’t see any structural issues with the property. It needed a refresh all around but the foundation was solid and the walls were in good condition. Our general contractor was able to walk the property shortly after and quoted us around $25,000 to get the home to a rent ready state.
We went in with a $40,000 cash offer and appealing closing timeline and the seller accepted.
Inspection
We had an inspector walk the property and he didn’t see anything beyond what our GC had mentioned. The property needed a new roof and had an outdated breaker box but the foundation was solid. These were all items that we had expected and accounted for in the original offer.
Similar to many aging American cities, most of the older sewer lines connecting homes to the main sewer line are made from clay. Over time, roots can create cracks and eventual breakages in the line. While Indy’s utility company is responsible for the main line, the portion from the house to the main is the owner’s responsibility. Due to this, we always get sewer scopes done. The sewer scope revealed a broken sewer line that would cost $3,000 to replace.
At this point, it was relatively easy to negotiate the seller down from the $40,000 to the final purchase price of $37,000 given the major structural issue we discovered.
R · ehab
We prefer doing larger scale rehabs because it allows us to control most aspects of the home. When everything in a home is brand new, you aren’t thinking about a 15 year old furnace potentially dying. On this rehab, while the home had good bones structurally, most of the interior needed to be redone. Some of the major items were:
new roof
rewired and updated breaker box
replumbed with pex
new kitchen
paint and vinyl plank
new sewer line
We also ended up having to do a new AC and water heater as the existing ones died due to old age. At that point, what else can go wrong?
(Sorry about the photos in advance, our GC isn’t winning any photography awards in the near future)
R · ent
Unfortunately, the rehab timeline put us square in winter when the least number of people are looking to rent. The property sat vacant for just shy of 2 months. Because the property was purchased with cash, there was no mortgage to pay during this time so we were only responsible for the small utility charges.
“If you want to do a few small things right, do them yourself. If you want to do great things and make a big impact, learn to delegate.” - John C. Maxwell
Real estate investing (business in general), is all about delegating the right task to the right person. Find what you do best and what you should be spending your time on and delegate the rest of the work. The entire rental process is handled by our property manager, we try not to interfere as long as they’re doing what we expect them to. We suggested the rent was $900, they suggested it was $970. That would have been $840 less per year, potentially more if the tenant continues to renew at a 5% rent increase.
This concept really extends to the entire process. Your operation is only as good as the weakest link - try to make yourself the weakest link.
R · efinance
We have a rockstar lender, his team is the best in the business for closing on investment loans (We’re happy to make introductions). Overall, this was a standard refinance. The appraised value came in at just above what we were expecting. $79,000 compared to the expected $75,000. The timing was also great as we were able to take advantage of the low rates.
$59,250 (75% LTV) at 4%, 30 year amortization
R · epeat
I’ll split this up into two sections. What the return was and my key takeaways.
Return
Money left in the deal
Purchase: $ (37,000) Rehab + Closing Costs: $ (31,427) Cash-Out Refinance: $ 59,250 *75% of the appraised value ---------------------------------- Left in deal $ (13,432) 25% Remaining Equity $ 19,750 ---------------------------------- Forced Appreciation $ 6,318 *The extra equity is forced through value add opportunities
Net profit
Rent: $ 970 Mortgage: $ (283) Taxes: $ (5) *Underwritten with $50 but kept the homestead exemption for Yr 1 Insurance: $ (43) Property Management: $ (126) *13% of the rent considering all the fees Vacancy: $ (78) *Indy's average vacancy is around 8% Repairs & Maintenance: $ (100) *$50 apiece ---------------------------------- Net $ 335
Cash on cash
Annual Net / Left in deal = Cash on cash $ 4,020 / $ 13,432 = 29.9%
While we like to look at cash on cash (COC), it’s really best as a year 1 return calculation. It may make sense to look at return on equity (ROE) as you start to pay down the loan and see moderate appreciation. (I say moderate but covid has caused crazy appreciation across many markets). A year later, the property taxes went up to the expected $43/mo but we were also able to rent the property for $1100, a 16% increase. You can do the math, hint, it works out in our favor.
To provide some context on how COVID-19 affected Indy, we refinanced a property in the same neighborhood the same year in December for $105,000, 33% more than it appraised for in April. Some of that was due to getting lucky with the appraiser but no one could foresee the appreciation across the real estate markets.
Take Away
At this point in time, the market was not as competitive as it was in mid to late 2020 and 2021, however, it was still a huge boon to have gotten our offer in so quickly. It’s entirely possible that someone else could have put in an offer a day later that would lead to bidding and lower returns. We were able to make a fast decision due to a few factors
Educating ourselves early on and knowing the neighborhood and prices very well
Having the right people who could jump in immediately
Offering attractive purchasing terms (e.g cash and a fast close)
In general, a lot of the work in real estate is done up front. We spent hundreds of hours educating ourselves, doing market research, building a deal analysis pipeline, networking, the list goes on. However, once everything is in place, it becomes very easy to rinse and repeat. The question is whether you want to continue doing the same thing or scale.
The first step is always the most daunting and often people get stuck. The industry calls it analysis paralysis. You know the numbers work but your mind may whisper, “It’s $70k… what if I’m wrong… what if I lose it all?”. One book that helped me was Set for Life by Scott Trench. He talks about saving money to take a risk, do something you wouldn’t normally be able or willing to do.
In my case, I framed my initial investment with this mindset. If I were to put $70k into a property and my numbers are wrong, the worst case is that I sell for a loss. Let’s say prices drop 20%, I sell for $56k and pay $3k in realtor fees. At the end of the day, I spent $20k for front row real estate education. For some, that would be too much but for me, it was an acceptable risk and helped me mentally get over the initial hurdle.