In any hot real estate market, finding a bargain is almost impossible…especially on the MLS. This diamond in the rough was distressed, run-down, and neglected for years. The seller had a headache and simply wanted to offload the headache and cut their losses. In addition to the need of a massive overhaul, this property came with a tenant on a month-to-month lease.
Reno Basics: New paint, New Flooring preferably LVP for resiliency, new fixtures, new appliances…fix it now, don’t wait for problems later!
This property brought challenges to include a difficult tenant, a tight budget, and a full renovation. Here we break down each one of those topics and more.
Acquired Rim Rd from the MLS with a bid slightly over asking price. 116K to close
This distressed house needed updates and plenty of TLC. All in Reno (including sweat equity) cost ~$22K.
Property acquired with a Fix/Flip, we chose a portfolio REFI with 2 other properties for our pivot to a 30-year loan. The hot market and inflation increased the amount of equity in multiple properties.
Comparative Market Analysis gave us our baseline of $1200/month. The same house was $900/month pre-reno. DSCR is roughly 1.33 (1200 rent/900 PTI)
Once Refinance is complete, it’s time to find another property and start the cycle all over again! Rim road happened after our last successful BRRRR at Bluffview.
Unruly Tenants
Whether you have one or two, or especially 100 units in your portfolio, problematic tenants are almost inevitable. Being considerate of others while operating any business is a tight-rope balancing act, but is manageable. It’s extremely important to plan for worst-case scenarios and have a plan in place in managing such situations. Check out our article on planning. It’s even more important to understand when it’s acceptable to be understanding of the human plight. We approached this situation with full transparency and attempted to work a transition for the tenant. However, the tenant had other ideas even if they appeared to be in agreement from the beginning.
After closing on the purchase of the property, the tenant neglected to payout any rent and complained when we issued them a 40+ day termination of lease notification. Regardless, they moved a week prior to the notice date so we could start the renovation. Some key notes: study state/area laws on evictions, consult with an attorney, plan for loss of rents, anticipate less than ideal condition of the rental, and consider the use of a collection agency.
As with any frugal investor, budgets are always tight. However, with the dangerous combination of a highly-competitive market and lack of inventory, the renovation budget is vital to reoccurring success. Regardless of your investing philosophy such as the 1% rule or BRRRR method or even a bloated short term rental market, there is a need to remain true to the numbers
A quick snapshot of numbers on this project placed the budget around $25K. The cash-out REFI @ 75% After Rehab Value (ARV) will leave approx. $5K-$7K of investment in the property with net annual income of $3600. All investments should be out in 18-24 months.
As with any one of our projects, the renovation is the most exciting part. Rim road needed the usual improvements: paint, flooring, cabinets, vanities, appliances, and finishes. For this project we replaced the front and back doors, windows, garage door opener, fencing, and some decking. We sub-contracted plumbing, painting, flooring, and granite to save overall costs of the project.
We always prioritize security and comfort with our projects. The old fence had a ton of issues due to age, poor placement, and poor construction. The decking rotted from years of coverage from the sun by trees and deadfall of mostly pine straw. All of which is commonplace in the sandhills of NC. The prior tenant destroyed the frame of the front door and the sliding back door barely slid open and shut. Both doors were an absolute must and top of the list for replacing.
The overall timeline ran shy of 8 weeks with the biggest lag around sub-contractors painting, flooring, and granite counter tops. As with any renovation anticipate for hiccups and delays.
In true BRRRR fashion, we identified the ARV and CMA for rents before we acquired the property which made this house compelling. In volatile markets, we don’t recommend overbidding just to acquire the property, but run your numbers. This scenario we overbid slightly and won. Ideal scenario is “All In” is less than 75% ARV. “All in” = Purchase Price + Reno Costs. The 75% ARV holds true to current Cash-Out Loan products from lenders. This project lost 2 months in the beginning with removing an old tenant and about 8 weeks for the renovation. Once market ready it took less than 24 hours to find an ideal tenant at the desired price point. We enjoyed this project and the result is a great property near commercial businesses in a quiet neighborhood.
Look out for our next project as we keep the BRRRR cycle rolling!