Deal #5: First Portfolio Deal (3 of 4)

The Deal:

Let’s talk about property number #3 from the BRRRR portfolio. This post is a continuation of Deal #3 and Deal #4. Same portfolio, next property. This time we learned a lot about buying properties with inherited tenants!

Deal Source: Local Huntsville Wholesaler; As I mentioned in my previous posts, the goal as an out-of-state investor is to ensure a quick, easy, and guaranteed closing. Due to our team being able to accomplish this on our previous deals, we were recommended as a buyer to this wholesaler’s deal from our main wholesaler.

Property Details: 4 bedroom 1.5 bath SFH, 1,464 sqft, inherited tenants.

Strategy: BRRRR (Buy, Rehab, Rent, Refinance, Repeat)

Estimated Numbers: Purchase: $65k, Rehab: $10k, Rent: $950/month, ARV: $90k

Financing:

Personal Lending: Same as Deal #3, Since all of our team’s cash was being utilized on property 1 and 2, we had to raise the money for the entire portfolio in order to close. We implemented all the lessons from the bonus content of the book BRRRR by David Greene and successfully raised the money for the purchase price of the properties. For the property’s rehabs we used our cash and split this cost between all the partners.

Rehab & Renting:

As I mentioned earlier, this was the first property we bought with inherited tenants. When we performed our due diligence we asked the seller numerous questions about the tenant’s payment history. We weren’t too confident in the seller’s responses so we underwrote in our numbers the possibility of an eviction and additional turnover costs. We actually asked for a $5k discount on this property to compensate for these costs. Luckily we were able to get the discount by just asking!

After closing on the portfolio, our property manager took over and we were immediately hit with an unexpected HVAC replacement. We were shocked at how poorly managed the property was before us. Next, COVID hit so we spent time learning about the new rules and regulations for landlords in Alabama. Fast forward through all the accommodations, back and forth communication, and various attempts at finding win-win solutions; we ended up not-renewing our tenant’s lease and pursued an eviction.

All said and done, we were pleasantly surprised by the condition of the property. We only needed to perform basic turnover repairs and cosmetic updates. However, we were doing multiple rehabs at once so it took about 2 months to get everything done. So the timeline from purchase, to occupancy with a new tenant, took around 10 months. However, this timeline did work to our benefit during the refinance process (detailed in next section). Overall, the rehab and rent process did take a little bit longer due to evictions and COVID but we were able to get the job done and can say that we are happy with the end result!

The Refinance:

As I mentioned in my previous posts, the cash-out refinance process is a pretty standard process. We started the refinance near the end of the rehab so that we could schedule the appraisal when the rehab was completed. We got lucky because the appraisal was performed right after the rehab AND before the new tenant moved in. When we applied for the cash-out refinance we thought the house was worth $110k, the appraisal came back and they said it was worth $111k. Talk about spot on!

The Result:

Purchase: $65,000
Rehab: $15,000
Rent: $1,050 / month
ARV: $111,000

Lessons Learned:

If someone is selling a property at a discount with tenants, there will be a problem you will have to solve. If the property was performing well with the tenant, then why would they sell the property?
Perform stricter due diligence when purchasing a property with inherited tenants.
If you gather new information during the due diligence and the numbers don’t work out, use that to negotiate the purchase price down. You never know how motivated the seller is.
Always underwrite conservatively, there will always be unexpected expenses.