Original condition when I bought the project. We had to board up the windows so homeless and druggies wouldn't break in. We had probably more than 10 break ins while we were trying to vacate rest of the tenants.
I bought Houston 4plex back in 2015. As you could see, the property was in a pretty bad shape: huge deferred maintenance, graffitis, trash all over, and rent controlled. When investors heard about rent controlled and huge deferred maintenance, they typically walkaway. However, I felt the project had a huge potential pre or post stabilized. I ran two scenarios on this project and it didn't sound that bad:
Contract Price @ $532,500
Existing Gross Operating Income @ $4050/month
2B/1B
2B/1B
1B/1B
1B/1B
Conservative Model
Buy/Hold with Interest Only Mortgage
Put 30% down and get a 10%+ Cash on Cash return
Not too bad with 10% cash on cash return for collecting rent as it is. However, I ran another model for more aggressive approach.
BRRR Model
Buy/Rehab/Rent/Refinance
The biggest hurdle for BRRR was rent controlled and the uncertainty of vacating all the units for massive rehab. With existing cashflow, I didn't feel that was an issue as long as I could carry the project until fully vacated.
Based on the worksheet, I could put up to additional $325k on CAPEX to bring the property up to market. My all in was $861k to bring the value up to $1.08m, while raising the rent from $4050/month to $8100/month. My updated cap rate would be around 8.47%. I got the updated appraised rent and valuation from appraiser when I applied for Fannie Mae's Homestyle Loan. The program allowed borrowing up to 75% of after repaired value for renovation (1-4 units).
The worst case scenario I would sit on a 10% yield on my capital or I could go aggressive that could double my capital and cashflow through renovation. The project was a no brainer for me.
Demolition
The job site looked like a war zone after demo.
Through the demolition, we probably created 6-7 tons of trash? I could not recall. We also found that there were numerous areas with termite damage and required extensive repair. All the steel pipes were rusted, which we had to re-piped with PEX, while the existing wires were using knob and tube with no grounding (ancient!). The insurance company refused to insure us at first due to potential risk arise from out dated electrical.
Fast forward 6 months later, we repaired all the damaged studs and re-laid out bedrooms. We ran into inspection issue with the city due to a concern over retro-fit windows versus new construction windows. The city wanted us to replace the windows with new construction, but we already spent thousands of dollar installed with retrofit. Their concern was the opened stucco surrounding the windows. A very high chance of rain leaking into the units. My contractor was very reluctant to correct windows but we had no choice but to replace them with new construction and re-do the stucco, which was a painful process slowed down our progress.
We have to re-stucco the windows
The contractor had hired a junior technician to wire the main panel, which caused so much pain and problem with the power company and inspector. The inspector told me the wiring was probably one of the worst he ever seen and he refused to let us go. Worst yet, my contractor wanted me to eat the cost because of his mistake. His previous mistake slowed down the whole progress by 6 weeks and I had to eat the window replacement cost. After numerous attempt to make him correct the wiring issue, he simply walked away from the job. I had to pick up the job myself. Luckily, I had remained good relationship with the subs and foreman. They never liked working with general contractor so we figured a way out to get the job going without interruption.
(Left is the original wiring done by the general contractor, Right is the updated wiring)
Once we were able to resolved the electrical issue, our progress picked up again. Things were moving fast after passing the rough-in inspections and all the way up to drywall coverings and tiling up the bathrooms/kitchens.
We tested out all the pipes, and electrical to make sure that it worked before the inspection. During the testing, we noticed foul odor smell from the backyard. Turned out the sewage line to city's mainline had been broken for all this time. The original sewage pipe was made out of ceramic back in 1920s. We had to re-shoot the sewage line to reconnect to city's main line.
Broken ceramic sewer line that was built back in the 1920's. We were wondering where the odor came from all this time
After resolving the sewage issue, we worked on the landscaping, and fences:
I like pavers more than the concrete
It got emotional when we finished the exterior paint
Finally, I was able to get it passed the final inspection. The renovation took more than 10 months, which we could have built it from ground up. Just saying...
By the time the project was completed, we were able to lease the units out above our projection. The 3B/2Bs were leasing at $2800+ per unit, while the1B/1Bs were leasing at $1800+ per unit. With the new lease, I applied for cashout refinance and got close to 100% of my all in back.
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