The 2nd BRRRR – Starting a stack
We offered on about 2 deals/month in the fall of 2019, and finally closed on a 6-plex in Norfolk in January 2020. It has fire damage to 2 units, 2 were under rehab, and 2 were rented. Plenty of up-side with the extensive rehab required and in a good C+/B- area about 1 block from ODU. BUY: 4860 sqft 6-unit: A) 2bd/1ba 810sqft; vacant (1/2 rehabbed) B) 2bd/1ba 810sqft; vacant (1/2 rehabbed) C) 2bd/1ba 810sqft @ $780/mo. D) 2bd/1ba 810sqft; vacant down to the studs E) 2bd/1ba 810sqft; vacant down to the studs F) 2bd/1ba 810sqft @ $780/mo. Purchase Price: 389k Rehab Budget: 85k Expected ARV: 531k Expected final rents: $900
We purchased using a local lender under a portfolio loan at 75% LTV, 25 years, 5-year balloon or call, at 4.00%. The down payment was covered by cash. It’s a commercial loan (>5 units) so the terms reflect the standard for this area. REHAB: We covered the rehab a PML and using our network of contractors got a competitive bid Units A/B (1/2 rehabbed):
o New LVP flooring o Drywall repairs o New paint o New cabinets o New toilets/sinks o New fixtures (plumbing/electrical) o New Appliances
Units D/E (Studs):
o Electrical/Plumbing-Repair/Replace o New Shower/tub combo o New LVP flooring o New drywall w/ knockdown o New paint o New insulation o New cabinets o New toilets/sinks o New fixtures (plumbing/electrical) o New Appliances
Units C/F (Occupied): Same as A/B once vacant
Exterior: o Landscaping o Exterior paint on shutters o New Roof o Wrap soffit/fascia, repair gutters o Power washing o New Mailboxes o Wrap Posts
RENT: So COVID-19 is a thing! In all seriousness this did affect our strategy. One of the rented units stopped paying the first month we acquired it(prior to COVID and not because of COVID), leading to an eviction notice. The court date was scheduled, then put on hold due to COVID-19 shutting down all courts. Not ideal, but a plug to always have cash reserves for vacancy and unexpected costs. We could float this one.
Original rent:
Unit A – Vacant (light rehab)
Unit B – Vacant (light rehab)
Unit C - $785
Unit D – Vacant (fire damage)
Unit E – Vacant (fire damage)
Unit F - $785
Post Rehab:
Unit A – $950
Unit B – $900 (slightly old cabinets)
Unit C – $785
Unit D – $950
Unit E – $950
Unit F – $785
**Units C will need a light rehab at the next vacancy to bring them up to $925-950/month**
Utilities: Electric – Tenant
Gas – None
Water - $35/mo water fee (owner pays remaining)
Garbage - Owner
Units A/B were ½ finished, it made the most sense to start there in order to get some more rentable units on the market. Those were finished in about 2 months, and rented in 2 weeks.
Next Units D/E, and were complete in about 4 months, both units were rented in 2 weeks.
REFINANCE:
We found a different local bank that offered better terms at 80% LTV and no seasoning period so we refinanced through them. Additionally, we had to decide when to Refi. With all units rented but not all rehabbed, we decided to Refi now and get our cash out for the next project. We could have waited until the last 2 units were rehabbed, appraised higher and received a bit more cash. But the cash now to start on the next turned out to be more profitable, especially when it’s hard to predict the next vacancy.
REPEAT. Some lessons learned for the next one:
1) Shop extensively for your local lenders and their portfolio loan terms. If we would have found the bank we refinanced with earlier, we could have done the original and refinance with them reducing our closing costs, getting an 80% LTV at the purchase, and strengthened the relationship.
2) Rehab on commercial properties requires some extensive insurance. Make sure to get a quote early. The insurance during rehab was well over our previous experiences. About 400% higher than expected. As soon as the rehab was complete, we re-negotiated the quote down to something 75% of what we had originally budgeted. I recommend PolicyGenius for shopping around.
3) Always have cash reserves dedicated to every investment and don’t spent it on the rehab! COVID-19 was a surprise to everyone, something you cannot expect, but can plan for! I would call COVID-19 an emergency for a lot of real estate businesses, so we used our cash reserves to cover the lost rent. Luckily, the tenant did end up paying all the lost rent plus late fees.
Can’t wait to find the next deal! 12units is next!