BRRRRR Case Study: Alberta 4 family

This series of articles will track our entire investment process on our newest property, which we will refer to as Alberta. It is a 4-family property in Saint Louis. We are attempting to BRRRRR the property, so we will be tracking each step. So without further explanation:

The purchase of Alberta:

How I found the deal: I am a sales agent in Saint Louis, and we specialize in Investment Properties. I called on a property and the owner said he was so burnt out and he wanted to liquidate his entire portfolio. The catch was that he wanted to sell it all as a package. I couldn’t do that. Enter John.

John is a real estate investor/contractor who has the means to buy the 7 properties, straight cash. He also has the experience to know that is was a good deal. We go and look at all of the buildings, and most of them are in surprisingly good shape. He negotiates a bit and settles on a price, and we move to close.

After looking through all the the properties, Alberta sticks in my head. I notice that 3/4 units are occupied, and all of the units are in roughly the same shape. They are rough by modern means, but livable at the $375/month that each tenant is paying. Two of the tenants are sisters as well, which I interpret as they are here to stay.

After checking it out with a contractor, who estimates the rehab between 10k-15k (for a few exterior items and updating the vacant unit.) I start with an offer of $50k. No need to pay retail. We go back and forth, and land on $60k for 4 units in Dutchtown. Score, building under contract.

TLDR Contract Details: Cash offer for simplicity and speed, inspection contingency as an escape hatch for lateral issues, and closing on the same day as John. He makes over $35k in one day selling this property to me, which I still think is a good deal.

Funding Our Deal: Since we have around 75% equity sitting in our house, we apply for a HELOC for $105k. This will cover the purchase, closing costs, and rehab costs for the startup stage.

TLDR HELOC Terms: Home must appraise for $220k since 90% of the equity is a step up in the APR. If we stay under the 90% threshold, our rate is 5.25%. The loan amortizes on a 20 year schedule, with a 5 year readjustment term. This is very close to the terms of a commercial real estate loan. The only cost for opening this Credit Line was the cost of the appraisal ($300)

TLDR LLC Loan Terms: To separate my money from company money, we are acting as a private lender to our LLC. We are going to lend the LLC money from the HELOC at +1% of cost for 0.5-5 years. The structure is undecided as of now, but something along the lines of 20 year amortization with a balloon payment at 5 years should cover it. This is a rate of 6.25% for the company, also not bad if you have ever shopped for private money loans. While the loan itself isn’t a great investment, it effectively eliminates “commingling” of funds, which gets sticky if something goes south. It will also create a $50-$100 cashflow each month for our family, which is excellent.

Estimating utilities is one of those places where you can miss by a lot, and it can screw you if your cashflow isn’t excellent. So wrapping your head around a good system for estimating those utilities you have to pay for makes it easy once you have it in place. It’ll be different for each municipality, but once you have a down for one then you can use it over and over again.
There were three bills for this project we had to estimate before making our bid were water sewer and trash. These are currently the three that St. Louis city landlords are expected to pay.
Water–   Water is the hardest utility in St. Louis city to estimate for landlord. This is because they use a flat rate system and charge by room or by toilet or by shower or whatever. So knowing how many rooms they’re charging you for is important, and I have heard people argue about that to lower their bills. STL City Water Rates
 Sewer– Sewer is based on your water bill and I didn’t have a great way to estimate that for this project. MSD Rates
Trash –  trash is easy, $14/unit. So this building will be $56/month. STL City Waste

Electric and Gas– Electric and Gas are usually handled by the tenants, but the landlord is responsible for these in vacant units. The easiest way to handle this is call each utility and get the “Landlord Leave on” set up. Its kind of a pain to set up, but easy to add additional units/buildings to once its going. It saves on costs between tenants, since if it gets shut off they charge a fee to turn it back on.

Insurance: Insurance should be set up prior to purchase and go into effect on the date of purchase. Shelter Insurance quoted around $500 annually, but upon inspection the exterior of the building needs to be brought up to their standard before they will underwrite it. They have a higher cost alternative through Foremost at $1000 annually. Do able until we can fix a few things and get into the Shelter policy for a huge revenue recapture. Shop around and see what people will insure, the rates vary wildly.

I think that’s about it for the purchase phase. Let me know if you have questions and I will try to update the article with extra info which your questions will help me fill in.