After completing my 203k renovation, I was eager to jump back into another home renovation. After listening to Bigger Pockets podcasts, attending local real estate meetings, and attending a local real estate training course I felt ready to buy something to turn into my first BRRR! (Buy, Rehab, Rent, Refinance)
Unfortunately it didn’t work out that way! I’m calling this my “rental” property because I really did have all the intentions to rent it out. However, my appetite for designing and renovating surpassed my judgement on this one. I could not get quality tenants at the rental price I wanted and could not refinance it for the price I needed. This meant my exit strategy changed from renting it into flipping it.
Let’s break that down a little further. I bought this house for $107,000 using a conventional mortgage, which meant putting 20% down! That’s $21,400 to put down which was coming from a Home Equity Line of Credit (HELOC). (Theres the B in BRRR) Closing costs added another ~$10,000. My construction budget was $25,000 and I ended up spending $25,242.91 – so I was on budget! Good.
There’s the second R. The problem came with the third and fourth RR – rent and refinancing. I was all in at around $142,000, so I needed this house to appraise at $142,000 – right? So it did. It actually ended up appraising for $170,000. Before I did that I wanted to get tenants in the house because I needed to know how much my monthly rent was. I can’t refinance and pull money out of the house if I can’t pay the mortgage with the rents I expected.
I listed the house for $1300 a month and got no qualified tenants. None. I received probably 50-75 inquiries through Zillow but very few responses once I followed up. Absolutely nobody filled out the questionnaire I made which had some basic questions. Many people asked whether we would accept section 8, which I was not approved for at the time. So what happened? I bailed. I bailed and I ended up just selling the house. Even if I could have gotten $1,300 in rent, that would have meant I had to leave my money in the deal and could not refinance! Problem was my money was tied to a HELOC that I was paying interest on. All in all I did a crap job with my numbers and should have waited for a better deal.
So in the end selling the house was the right decision. I’m writing this in the middle of the Coronavirus lock down and had I held onto the house I would have been really struggling.
This was a big lesson for me to learn to wait for the right property. If I had bought this for 20k less, I would have been in good shape. Nevertheless this was a great learning opportunity and taught me some valuable lessons in time management, checking my numbers, and building relationships with contractors.
Broke the Budget on the Rental Rehab: Visit this post for a more thorough breakdown of the renovation budget and shop the house.