The Ellsworth House
Property Overview
The Ellsworth Property was our first BRRRR (Buy, Rehab, Rent, Refinance, Repeat) property. Fun fact: this is technically the first house we owned because we offered and secured it under contract two weeks after getting the Miller house under contract and closed on the Ellsworth house before the Miller house.
How we found it
I found this house on a Real Estate Off-Market Listing group on Facebook. They posted it directly to the group. After some rough analysis of ballparking renovation costs to be $30,000 and the After Repair Value (ARV) to be $150,000, we asked our real estate agents to walk the property and we locked it in under contract shortly for full ask at $85,000.
How we funded it
Short version: We used a hard money loan that funded 90% of the purchase and 100% of the rehab. We had brought 10% down to the closing table + closing/title costs.
Since this was our first attempt at a BRRRR property, we called 3 different contractors to walk and bid on the job. And in case you’re wondering, this will still lead to us finding a lender. One of the contractors, who we initially loved (before we found out he charged WAY more than the others), referred us to an investor-focused real estate agent, who introduced me to a local hard money lender. Yes, networking works. :)
A hard money loan (HML) is a loan that is backed by the potential value of the asset itself and is typically only loaned to business entities like an LLC or S-corp. It also usually costs more in points and interests. The borrower also makes monthly interest-only payments with a balloon payment due at the end of the loan which is usually 6-12 months. Because of how expensive the money is, the faster you can exit the loan and flip and sell or refinance the property the better.
We created an LLC to secure the loan and put 10% down while the HML funded 90% of the purchase + 100% of the rehab.
What we did right
Network. This was the deal that I started to really start to build relationships with other investors, contractors, and future members of our team. It’s opened so many more doors!
Be willing to pay contractors to bid. As frugal as I am, I knew that in order to secure bids from quality contractors and ensure we weren’t overpaying we had to pay for contractor bids. Most charge anywhere from $150-$250 for their time and bid, however, if you select them for work most will roll that cost into future work. Big note, because we networked and received introductions to all the contractors I contacted, most waived their initial bid fee and we were able to get 3 bids without paying. However, I know I won’t always be this lucky.
What we learned
Rehabs will ALWAYS go over budget. Our initial rehab budget was $35,000. Already on after we replaced the roof we already spent $1000 more than we budgeted for the roof. Luckily, between the roof and buying a new refrigerator that was the only overages and we spent a total of $36,700. While $1,760 isn’t a huge amount over, we did enter the rehab naively optimistic that we would stay 100% on budget. From now on, I’ll immediately adjust my mindset and add 10-15% to the rehab budget, and expect that to get spent.
Breaking down the numbers
Running the numbers is a bit more complex for a BRRRR property because there are three phases of the project. There’s the rehab period (2 mo), the initial rental period (4 mo), then finally the refinance phase. For simplicity's sake, I will focus on the refi stage since that is the phase that it is in now and will be in for the foreseeable future.
It took us 6 weeks after rehabbing the property to rent it out. We initially had it marketed at $1300/mo, but dropped it down to $1250 after not receiving enough quality tenant applications. After about 10 days of marketing it at $1250/mo, we signed a tenant on a year lease.
Most banks will require 6 months of seasoning (or a wait time) before you can take a new loan out on a property and refinance. We funded the refinance through a local mortgage broker, NFM Lending. The property appraised for $177,000, which is $22,000 higher than I thought it would. I’ll attribute the crazy real estate market to that extra help. With the new appraisal value, we were able to do a cash-out refinance of up to 75% of the property's value, $131,000.
At the time of refinancing, we owed our hard money lender $101,000, paid $6000 in monthly interest-only payments, and had initial cash to close (downpayment + closing costs) of $17,000. After closing costs of the refinance, the lender sent us a check for $24,000 which covered all the initial down payment and interest, with an extra $1000 in our pocket. The perfect BRRRR!
The property itself, after paying expenses (PITI, management, Capex/maintenance) cash-flows about $140/mo with none of our initial money left in the deal.
But the best part…. the $46,000 in equity we made in the deal based on our rehab! That’s money we can tap into via a HELOC or when we sell the property down the road. On to the next one!
