BRRRR! BRRRR? Yes it's cold outside, but BRRRR is a widely used strategy used in the world of investment real estate. It stands for Buy, Rehab, Rent, Refinance, Repeat! It is a strategy that allows developers to grow their portfolios exponentially over time and recycle the same investment capital over and over again. This is how you can build a real estate empire essentially without access to cash being a bottleneck to your growth.
OK, now story time:
About 3 years ago, I got contacted by a real estate broker about a commercial property he was going to be listing in an area where we own property. When I asked him the price, my jaw dropped. The price was $1 million dollars! All those zeroes and commas! I have to tell you I ,was intimidated. We knew the property was worth a million but I offered $947,000 because, well, we were more used to 6 figures.
The seller immediately countered at $1,000,000. So I contacted my lender and asked if they could do 80% LTV and a 25 year amortization to make the numbers work better. (We had a required on cash on cash rate of return of 11%, and the only way to conservatively get there was by having the lender do a policy exception. They usually only do 75% LTV, 20 year amort or 80% ltv, 25 year amort.) Due to our relationship, they said "yes" and made a policy exception.
So I was going to need $200k for down payment, and $100k for closing costs, operating capital and some capital for some property improvements. $300k, which I didn't have... After getting the property under contract, I quickly got to performing due diligence and putting together my pitch deck to start raising the capital, another thing I never did before. I was used to presenting opportunities to lenders so I took the same approach to presenting to potential equity investors. Believe me, I was sweating. Especially after I put $50k in earnest money down.
Yada yada yada, so last week, we just closed the cash out refinance and I took home a darling check for $310,000, which was pretty cool to see in my bank account for 2 seconds before I wrote a check for $300k to pay my investors back! Now that I have your attention, if you want to review the very long winded manner in which we pulled this off, continue to read below. If you are happy with the yada yada yada version, you can stop here, mask up and give me a virtual (covid friendly) high five!
Raising the $300k was a lot easier than I anticipated. Why?
1.) The asset was in a great location.
2.) The projected numbers were very conservative; income conservatively low, expenses conservatively high; so the investors knew that I wasn't B.S.ing them with pie in the sky financial projections.
3.) The asset was 100% occupied and had history of strong occupancy.
The business plan was simple: raise rents to market value as leases expired (they were drastically under market based upon our market survey and the fact that it seemed to always be at 100% historical occupancy), and normalize expenses. The expenses were abnormally high. Utilities were God awful high and the management company had a maintenance employee stationed there for half the day, every day. AND they were paying for their snow removal company to salt and shovel the sidewalks to the tune of $10k a year. These were just a few items of financial waste discovered.
During our due diligence:
1.) We found that 20 hours a week was not necessary for a maintenance employee on a 20,000 square foot building. The management company swore that he was needed there... and the tenants loved him... and he would be sorely missed if he wasn't there everyday. Through right sizing and only having maintenance there on an as needed basis and for proactive trips, we were able to save $20k per year!
2.) In analyzing the utility bills with my energy consultant (shoutout to Enlightened Energy!), we found that the electric usage was just as high during the winter as it was during the summer. This didn't make sense. It was normal to be high during the summer with the usage of air conditioning with the expectation that the usage would taper off in the winter. The building was heated by steam during the winter. When we dug into it further, we found that the air handlers for the A/C units were not shut down at the end of each cooling season. Tenants had thermostats in their office suites that they had set at 68 degrees. The building wide thermostat for the steam heat was set at 70 degrees! So imagine that, the A/C and the building steam were fighting with each other the whole winter! Furthermore, we found out that the management company maintenance person had the pressure for the boiler dialed up so high that the whole steam system was packed with a head of steam (at all times!), so that the individual tenants had on demand steam. By the way, this is not way steam heat systems work. This was not only wasteful from an energy perspective, but it was also putting undue stress on the newer $50k boiler that was installed by the previous owner! Through a small investment in an energy consultant and having them integrate real time energy management, we were able to save about 30%, or $10k per year.
3.) I put the snow removal out to bid and we found a company to do it all inclusive, unlimited trips, and snow shoveling for $5k per year. $5k in savings.
4.) By increasing rents up to market as leases expired, we were able to push the annual revenue to $225k from $198k.
After executing this plan we were able to squeeze an additional $60k per year in NOI (Net Operating Income)! In order to capitalize on the low interest rates and positive lending environment, we jumped on getting the asset refinanced. The property reappraised at $1.4 million so we were able to refinance and pay our investors back. Now we have an appreciating asset that cashflows over $40k per year! Now we're looking for our next $1,000,000 BRRRR deal in Rochester, NY so if you know anyone who owns commercial property in a great location please think of us! Or if you'd like to invest with us, get on our distribution list here to learn about our next opportunity!
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