My BRRRR House Hack Case Study
$50,000 Over Budget and Still Coming Out Ahead
This is the tale of my recently completed house hack/BRRR (buy, rehab, rent, refinance, repeat) project. As the title says, I ran $50,000 over budget and still came out ahead. I did this by buying right, being selective with the improvements I did—and, of course, with a little luck.
In the spring of 2016, we moved to an amazing new city: New Orleans! We had a multitude of reasons for moving here, but one of the many reasons was so I could expand my portfolio to another MSA (Metropolitan Statistical Area). Part of the process of moving to a new city meant finding a place to live. I wanted to take my years of real estate investing experience and use it to do a combo BRRR/House Hack for a new primary residence.
While my significant other and I have been together for several years, real estate investing was my thing, and she didn’t really have any interest in it. She was familiar with my previous house hacks because I’d spent close to a year sharing stories and articles with her about house hacking—how it’s a great way to lower living expenses and build wealth—but this would be our first project together.
My goal for this project was to find a small multifamily property where we could add value—thereby increasing our net-worth—and where we could live in one unit and rent the other unit(s)—thereby reducing or eliminating our living costs. Then, after we moved out of the property, we could also rent our unit and generate income from the property.
Side Note: We also had all the other typical house hunting goals: bed/bath count; being in a safe area; being close to public transportation; being walking distance to bars, restaurants, and shopping; being in a property that had the New Orleans charm.
After determining the project goal, it was time to start finding potential deals.
Opportunity in New Orleans for Small Multifamily:
Not every city has a lot of small multifamily properties, but here in New Orleans they’re quite common. The city is filled with doubles (duplexes) and triples (triplexes). You can find them ranging in price from as low as $100k to over a million dollars. They also usually have a nicer “Owner’s Unit” as well, with better fixtures and finishes than the rental side—which helped appease my significant other. I also noticed that this area has a higher percentage of homes with guest houses, mother–in-law suites, former servant quarters, and detached or accessory buildings on the property.
I focused on finding a distressed double that had an accessory building or guest house—basically, focus on buying a place cheap and then fixing it up. We’d then live in the nicer Owner’s Unit, and then rent the other half to a long-term tenant in the hope that the other side would cover a large portion of our mortgage. We’d have the mother-in-law suite or pool house to put up our family and friends when they visit (boy do people love to visit us in New Orleans). We could also rent it out during peak tourist times like Mardis Gras or Jazz Fest to generate additional income.
Finding the Deal:
To find great deals, you need a killer network. Being in a new city, this meant I had to set up a new network. I started going to my local REIA to meet with wholesalers to get on their buyers’ lists. I networked with a few Realtors as well. I had one of the Realtors I liked set me up with email alerts from the MLS (Multiple Listing Service) on properties that meet my criteria. Then I used Zillow and Trulia to set up my own search criteria and alerts for new sales. I also used Zillow to search every week for open houses to visit. That was really key since I wanted to walk through other properties that were for sale and see the quality of fixtures and finishes they used. I wanted to make sure I didn’t over– or under–renovate my property once I found it. I also wanted to get familiar with the different neighborhoods, and what fully-renovated homes sold per square foot. This was all information I knew in North Carolina, but being in a new area it was all critical information to learn.
Over a 6-month period, I probably got alerts and emails on over 200 potential deals. Then I probably went and looked at over 20 properties in person.
The Potential Deal:
One morning I got an email alert from my Realtor about an old 1920’s-era corner store. In New Orleans, the typical corner store was set up so that the owner lived upstairs and had their shop or corner store on the first floor. Folks would often convert these old corner stores into single–family residences.
It came on the market at $345,000, and it needed a ton of work. I could tell just from the pictures and notes in the listing (bad plumbing and old knob & tube wiring) that it was priced too high to do renovations and still have a lot of upsides. There was also a very messy tenant in the upstairs, and the downstairs was being used as a personal art studio for a random tenant. As a result, the property didn’t show well. But here’s why I thought it had potential:
- The property needed a full gut, so this gave me the option to customize the property. I could change the layout if I wanted, I could bring everything to code, and I wouldn’t have to worry about any major CAPEX in the foreseeable future.
- The layouts were all wrong. New Orleans is full of shotgun–style floorplans where you had to walk through one bedroom to get to another bedroom. Then the downstairs had a studio space and several back rooms with multiple makeshift kitchens. I knew I could configure the property to maximize space and rents.
- There were two gas meters on the property and three electrical meters, but only one water meter. The property was also grandfathered in on the old zoning. This gave the property the potential to be divided into three units, even though new zoning only allowed a max of two units. In addition, the current owner was paying water for all the tenants. I also knew I could sub-meter and pass the costs to the tenants, which would save on expenses and increase the value.
- The listing agent measured the property wrong. With the experience, I had to look at hundreds of properties over the years (and renovating a couple of dozen), I thought the square footage seemed off as I was doing my walkthrough. When I take a serious look at a property, I do my own measurements from both the outside and the inside—and that’s what I did here. And guess what? The listing agent ended up being low by about 200 square feet! This was a $20,000 to $40,000 mistake on their part.
- And the cherry on top was a detached, two–story, one–car garage building that had plumbing but no electricity. On top of having the one car-garage area, there was roughly 500 square feet of unfinished space upstairs. The biggest challenge besides no electricity was that there didn’t appear to be a way, due to lack of space, to create stairs to code to access the second story without giving up too much space for the car in the garage—so everyone else looking at this property dismissed this space. I believed I could put in a spiral staircase to get access to the second story and still meet code.
Getting the Property Under Contract:
It came on the market at $345,000, and as I mentioned above, it needed a ton of work but had a lot of upside. After viewing the property, and having my Realtor ask tons of questions, I submitted a verbal, low-ball offer, knowing it would probably get turned down. And, of course, my offer got turned down. But I wanted to get my name in the mix
After about 30 days of it sitting, they did a price reduction to around $300k. I got an email alert when the price reduction hit the MLS. Unfortunately, I was out of town traveling for work, so I didn’t see the email for a few days. I missed out and someone else got it under contract. But I knew that if they reduced the price, they might be more willing to negotiate if the current offer fell through. I had my Realtor send in my financials, a prequalification letter from a hard money letter, along with an offer at $295,000 so I was in a backup position. I also had my Realtor stress to the seller that I knew what I was doing and had her show examples of previous work I had done. I wanted them to know I was someone that dealt with projects like this and was someone that could close.
As luck would have it, about fifteen days later, the current buyer backed out due to the extensive work needed. It was a lovely couple: he was a doctor and she was a lawyer. But they were not investors and didn’t have any experience with a project like this. They wanted to convert the property into a single-family residence where they could raise their family. They had also spent over $2,000 for a multitude of inspections from the standard home inspection, to a roofing inspection, an HVAC inspection, an electrical inspection, and a video plumbing line inspection. My guess was the knob & tube wiring (which had to be replaced to get insurance on the property) and the broken sewer line was what scared them off. But it worked out great for me, as my backup offer of $295,000 was immediately accepted.
PRO TIP: I offered the other previous buyers $100 cash for copies of their inspections, and they agreed. They were able to recoup a little of the money they spent. And this saved me both time and money.
Then after reviewing all the inspections, and walking through the property with my contractor, I came back to the seller with a counter. Our final contract price was $277,500, with an effective net price of $270,000 after I got the seller to agree to pay for several thousand in closing costs.
What Were the Challenges?
This was by far the most challenging project I had ever done. A lot of times we only hear success stories and don’t hear about the challenges or failures. It’s the challenges and failures where we can really learn. So here they are:
- My First Project in a New MSA (Metropolitan Statistical Area) & My Largest Renovation to Date – This was the first project I was doing in the New Orleans area. So, even though I had experience in real estate, I didn’t have experience and connections here. I had to build a network, find sub-contractors and a general contractor, I had to learn zoning, and I didn’t know anyone in the city building department. These things clearly didn’t stop me from doing the deal, but they did slow the process down a bit along with causing more upfront work to be done.
- Making a Home, Not Buying an Investment – As I mentioned in the opening, this was my first project with my significant other. And while she understood the idea of doing a house hack, we had two very different philosophies: I was buying and renovating an investment, but she was making a home. This was the first property she would own, and this was the place where we would live and be a family. I am sure you can see how these two mindsets can cause conflict. For the unit we would live in, I had to make a lot of concessions. A couple great examples are: when we picked out tile for the bathroom, she shopped based on what she thought looked good, whereas when I shop for projects, I start with price first. I would have picked tile that ended up around $3 a sq. ft. but we ended up with tile that was $15 a sq. ft. For the kitchen cabinets in the rental units, we did a white shaker cabinet with crown modeling, which looked stunning. But this didn’t meet her tastes, so we ended up with a higher–end style which cost about 20% more. While her choices helped to inflate the budget, I do have to give her credit for creating a truly stunning design. Throughout the process, I just had to remind myself, “Happy Wife, Happy Life.”
- Grandfathered Zoning – Because of the home’s age, we were grandfathered into the previous zoning which allowed us to create three units versus two. This was a plus. But what I discovered is that, if you modify more than 50% of the building, you would lose your grandfather status—which meant I had to go with the current zoning. Doing a full gut renovation would have easily exceeded that 50% threshold. To get around this, we split the work into two phases: exterior and interior. Normally you can have crews doing exterior work while you have a crew working inside. But here we couldn’t. This basically doubled our timeline. Also, because of the age of the property and the work involved, we needed to have formal plans submitted which meant we needed an architect. More on that later.
- 6–Week Shutdown – Since we had to split the work up between the interior & exterior, it meant pulling permits twice. We started with the exterior work, pulled permits, did the work, got inspections done and closed out the permit without any problems. Then we went to pull the interior permit, we were told it would be approved in 48 hours. The time passed and nothing. We checked back and were told give it another day or two. Then, nothing. We were told to check back the following week. When we did, we were told our permit was denied because we were not meeting code. One of the examples they gave was that they said we were adding a full fourth kitchen in the detached building. In our plans we had a kitchenette or wet bar area. It had a mini-fridge and half sink. The code said a full kitchen required a stove, full–size fridge, and full sink. We were not in violation, so we submitted our appeal. We were turned down again, but for another frivolous reason. We appealed and were turned down again. We filed an appeal to the head of the department, and then were told it would be at least two weeks as the department head was “busy”, and then had a vacation, and would then be away at a conference. After over six weeks, we finally had our interior permit approved. This was six weeks of no work, this was six weeks of carrying costs. I truly believe our permit wasn’t approved sooner because I wouldn’t pay a bribe. What a great welcome to New Orleans.
- Architects Design First – Working with a creative and experienced architect can be great. They can help maximize the space you have, reduce overall construction timelines, and design to help reduce material costs. But keep in mind, they tend to approach things with a “design first” perspective. This can be costly as if you don’t manage your time with them: that hourly rate can really add up. In this process I found it was best to not have my partner meet with the architect without me because they could spend hours dreaming up all sorts of things. And those were billable hours.
- That’s Not the Right Color – In all my past projects, I use the exact same paint. I use a Behr flat white for ceilings, a high gloss white for the trim, and a specific color for all my walls. It saves time because I don’t have to go pick new colors, and doing maintenance touch up painting is easy as I always know what colors I used. Not in this case. Because we were going to be living in one unit, we “had to” have multiple colors. That means the main rooms were one color, the bathroom another color, the bedroom yet another. Then, for the outside of the house, we had to test multiple colors from different families to see what color family we wanted. Then once we had the color family, we had to test multiple samples from that family to make sure we got the perfect color. All of this took time. Then, once we finally got our colors picked, we had issues with the paint not going on right. We had the correct sample, but our contractor was picking up the paint from a different store and apparently their paint machine wasn’t mixing colors properly. There were lots of tears shed because the color wasn’t coming out the way she wanted. We ended up doing a lot of repainting. We probably spent an extra $2,000 on paint samples, along with labor & final materials. This was on top of adding extra time to the project. I just reminded myself, “Happy Wife, Happy Life.” [Symbol]
- Residential but Commercial, & the State Fire Marshall – In most places, a property is still considered residential if it has four units or fewer. But no, not in the wonder state of Louisiana. For some reason, if you had three or more units, you had to submit plans to the State Fire Marshall proving you were providing adequate egress. We had to show we were going to provide a one-hour fire rating between each of the units. Then we also had a weeklong battle proving that we didn’t need to put in a fire sprinkler system as we had fewer than four units. I fought this battle because a sprinkler system would have costed thousands, and thousands of dollars. All of this took time, which meant more money.
- The Case of the Missing Water Meter – The previous owner was paying water for the whole building, and this was running him $300 to $400 a month. I knew if I sub-metered it could help me save thousands on expenses. When we talked with the city about adding two additional meters, they gave us a quote of $2,000 to $2,500 per meter. This was quite responsible as I knew I could recoup this cost in about 24 months: that’s a great ROI. But in the process, they let us know there was actually a second meter already at the property, but it was inactive. We could have it reactivated for a nominal fee. This was a great win, or so I thought. It took about 6 weeks for the new meter to go in, and during the time we attempted to get the other meter on the property activated. Well, it took the city two months, with me calling and stopping by multiple times a week, for them to realize someone years ago made a mistake about the additional meter on the property. I then had to have a third meter put in, but they wouldn’t expedite the process. At this point, all the renovations were done, and we were ready to move into our unit, but couldn’t because we didn’t have a water meter. This meant another month of carrying costs. I wish I could say my issue was a random blip in an otherwise well-run agency, but if you Google “New Orleans Sewer & Water Board,” you’ll see hundreds of articles about problems like incompetent staff, bad systems, people getting billed thousands of dollars for mistakes made in meters being read wrong, and corruption.
- Bad Draw Inspector – For this project, I used hard money financing upfront to cover a portion of the acquisition and renovation costs. The lender would do a holdback on a large portion of the renovation funds. They then would disburse the remaining funds as a draw when work is completed. Normally you break up the draws in 3 to 7 installments. Before the lender approves a draw request, they send out a third–party inspector to verify the work was completed that you said you did. This whole process is pretty standard. The challenge I had was with the inspector the bank hired. They did inspections part–time, and they had a full–time job, so it was incredibly difficult to get them scheduled. On several occasions, it took a week to get them scheduled. Then, I found they weren’t very experienced. I had to explain in detail the work we were doing. A great example is they couldn’t tell that the roof was new, whereas an experienced person could come out and look and tell. They also made a mistake on every report they turned in. This caused them to have to come back out on two occasions. And it caused additional delays in getting draw requests approved. In previous renovation projects, I could get a draw request submitted to having funds in my bank account in three to five days. With this project, we were averaging between ten to fourteen days. For small projects, it’s not that bad as you only have to float a couple of thousand dollars. With this project, there were some periods were I was floating over $50,000 on top of the down payment on the property. Ouch!
- Penalty Financing for Going Over the 12-month Balloon by 15 Days – As we were getting close to finishing the project, I started to line up the permanent financing. I found a local bank that knew the market and had good reviews along with competitive financing. I had them get started on the loan 60 days before my renovation loan ballooned. The appraiser made multiple mistakes like measuring the square footage wrong and using foreclosures & un-renovated properties as comps when there were recently renovated & new construction homes in my neighborhood. The bank sent the appraiser back out two additional times. Also, in the process the loan officer left for vacation and didn’t tell me. Then underwriting lost half of my file, and I needed to resubmit all my financials again—and of course they requested this while I was out of town. Needless to say, the bank didn’t close my loan on time. All in all, it took them 75 days to close. I could typically close a loan with conventional financing in 30-40 days. This caused me to need to get an extension on my renovation loan—almost a $5k hit.
House Hacking Summary:
This was a giant project with tons of lessons learned. My biggest saving grace was that I started the project in a very strong financial position. I had a steady salary from my W2 job to live on, and that let me qualify for conventional financing. In addition, I had other cash-flowing properties that generated income. The project didn’t turn out the way I had hoped: we ended up way over our timeline, and over budget, but we still came out a little ahead in value. We also ended up with a great place to live, in an awesome location (2 blocks from the street car, and tons of bars, shops & restaurants all in walking distance) and eliminated our housing costs. Then, when we move out, it should make a decent rental.
If you want to learn about house hacking, you should check out my Ultimate Guide to House Hacking.
To see my first house hack at 20 years old, follow this link: https://fibyrei.com/my-first-house-hack-at-20-years-old/