A Turn of Events to Turn a Profit
What started out as another BRRRR turned into a flip!
When Covid-19 shook the world it changed a lot of things including the housing market. Buyers were hesitant to buy and sellers were scared to sell due to so much uncertainty regarding income, health, the market etc. I quickly switched my strategy from buying rentals and flips simultaneously to just buying rentals to hedge myself against a possible recession, and ended up buying this one in April 2020.
I bought it from a wholesaler and it had tenants that were month to month. Understanding that it would be difficult to evict them I opted to work with them and offer them cash for keys and be a little patient while they found a new place and although it took about 2 months, they eventually moved and were very thankful.
The rehab was painstakingly long as I understaffed myself by not having enough contractors to get it done quicker. Being that it was a duplex there were two of everything that needed to be redone. Ended up being quite a hefty project with a new roof, new HVAC units, new electrical/plumbing, new kitchens, bathrooms, paint and flooring. In the end it took twice as long and went over budget (typical) but turned out awesome.
Then came the refinance and Covid’s effects struck for the second time. I was promised that I could do a cash out refinance at 75% LTV as I normally do which would allow me to recoup my first position and even snag a little extra cash, however when I moved forward we discovered that the property was technically an illegal duplex since it was built and still zoned as SFH. The hard money lender I used for the initial purchase never brought this up so it came as a surprise. In addition, Covid had tightened all lending parameters and they could now only offer me 60-65% LTV which was a HUGE drop and wouldn’t even come close to the return I planned for.
So I shifted gears once again and decided to sell it as a flip to either a house-hacking owner occupant buyer or a turnkey investor. By the time it listed, the market had again evolved into a heavy seller’s market; historically low rates making buyers desperate to take advantage and buy, and sellers holding on to their properties that were now a goldmine since there was no inventory. Thankfully this paid off and it sold 10k above asking price! This turned out to be a win, but absolutely not without blood, sweat, tears and a dozen new lessons learned.
The Numbers:
Purchase: $58,000
Rehab: $37,000
Carrying/Selling Costs: $11,500
List Price: $140,000
Sold: $150,000
Lessons Learned:
Have a consistent criteria for your properties that allows you to have multiple exit strategies!! I aim to be all in (purchase, rehab, carrying costs) for up to 75% of the ARV. This allows me to either refinance at 75% LTV and execute the BRRRR strategy, or if something changes and I need to sell I know I have 25% equity in the home and should have a decent profit. Of course you should know your plan before you even buy, but this is a perfect example of how things can change and being prepared will still set you up to win.
Have enough manpower to handle the job. I had a great contractor who did good work at a great price but it came at the cost of taking way longer than planned. Especially with older homes always having surprises that pop up, it would have cost me virtually the same by hiring a larger crew. Yes they may cost more, but if they get it done in half the time that saves you on carrying costs and gets you quicker to completing the project.
Be stern but fair, all while still being relationship forward. Your tenants aren’t your friends and they certainly don’t see their landlord as their friend. I made it very clear to my inherited tenants that I needed them out so I could start the rehab, but I was also clear that I was willing to help them. Offering cash for keys and continuous follow up motivated them to move without any tension or need for a messy and expensive eviction attempt during a pandemic.
Before
During
After
