Deal Analysis: Value-Add Duplex Refi & Infinite ROI
I don't count a rental property project as "complete" until it's fully leased and refinanced. We have refinanced every rental property we own because in the end, you own the property for little to no money down while making a profit every month AND getting the mortgage and expenses paid by tenants. When you cash out refinance all the money you put in for the down payment and the renovation, you now have a good chunk of money to pour into a new project. This is what is known as the BRRRR method (buy, rehab, rent, refinance, repeat). Here's how that method played out in real time on the 'value-add' duplex.
We bought this two-unit property for $225,000. It was a bank-owned REO property that no one wanted. In fact, it was originally listed for $299,000 and I watched the property sit on market for almost a year as they kept reducing the price. More on how we negotiated to buy the property here. (But make sure you come back and read this post because this deal turned out way better than I even knew it could at the time of that writing.)
I think the reason no one wanted this house is because it was a 2-bedroom, so each unit was 1-bedroom. To make this deal work, I knew we had to convert it to a 4-bedroom (2-beds in each unit). Once that was done, the value would be forced higher. I anticipated an after-repair value of $435,000. But thanks to COVID and the crazy real estate market we are now in, the bank appraisal came back at $500,000! Which is insane.
A major bonus
Another insanely amazing occurrence -- thanks to a town-wide reassessment -- our taxes got dramatically reduced while we were in construction. From $11,023/year, down to $7,424/year!
Holy... SHIT. I'm sorry but in New Jersey where property taxes are ridiculous that is like a miracle!
That's not to say we didn't have bad days on this project. The biggest problems we ran into were a supply chain freeze (due to COVID) and a huge run-in I had with our plumber. Sorry, not sorry.
When COVID came through in force, all the cabinet manufacturers stopped working. So we had to quickly grab whatever was in stock and then piece together two kitchens. We also had to simply buy whatever faucets and vanities were not on backorder due to factory shut downs. Going to Home Depot was also a joy, since they had lines down the street due to capacity limits. We couldn't get into the tile store to look at samples or buy products. So my answer was to order everything online for delivery, including samples, ugh.
The issue with the plumber was this: he never ever showed up at the job site to inspect the work. He had workers that were apparently untrained to do any sort of decent plumbing and then he never laid eyes on it. Until we had a leak, or three.
And by leak, I mean water pouring through the brand new drywall ceiling, down the walls and pooling on the new floors.
The first time, I was forgiving because mistakes happen and he came right over to address it. The second time he also came right over but I wasn't so happy. The third time, I was livid. Needless to say, we won't be working together again in the future. Here's how you avoid a similar situation: always do an air pressure test prior to turning the water on inside the house. An air pressure test is standard, so you don't spring a leak like this one. But my plumber's untrained workers, didn't know that or didn't care. And I didn't know they turned the water on until I showed up a few hours after they left for the day and found a nice surprise.
So after all the wins and headaches, here is how this deal shook out:
After-repair appraised value: $500,000
Post-refinance mortgage: $350,000
Cash out: $64,848
Monthly rent from both units: $3,825
Monthly payment (mortgage, taxes, insurance): $2,188.90
Monthly cash flow or profit: $1,636
Return on Investment (ROI): Infinite
We now own this house for $0 and it pays us $1,636 in cash every single month. THAT is the power of investing in real estate.
Happy to answer any and all questions on this deal below! Or on IG.