How to determine ARV for small multi so I can BRRRR?

[Ashley Benning]

I'm actively seeking small multi-family properties that I can BRRRR, and am wondering if anyone has come up with a good system or formula for minimizing risk of not hitting that 70-75% LTV threshold for the ARV on the later refinance. My understanding is that value on small multis (2-4 units) is based on comps and also on NOI. A few questions:

1. Should I be comparing just the property TYPE (duplex, triplex, quad) for comps, or should I really be looking at price per DOOR within the general category of small multi-family? 

2. How does NOI enter into the equation? If I find comps for ARV that are, say, 30% higher than my purchase and I am also able to raise rents by 30% after renovations, is the bank going to say "You've created a 60% value add on this property?" (Does that make sense?) Or does NOI have really no bearing on it?

3. Do people ever hire an independent appraiser during the inspection phase to provide a theoretical ARV?

I guess I'm trying to read the minds of the banks prior to even making my offers, so I can make sure I don't back myself into a corner later and have to leave money in the property. I'd rather bid low on lots of properties and have a harder time getting under contract but be safe in my refinance than try to get under contract and then be stuck later. I'm using HML for the purchase so the idea of not being able to pull out all my original investment after refi is a bit scary.

Thanks for sharing your experience and advice, everyone!

(Not sure if it makes much of a difference, but I'm looking in the Phoenix metro area, and especially around ASU.)

[P.J. Bremner]

@Ashley Benning

I will be closing on 2 duplexes in the middle of next month so I have been doing a ton of research on these questions.  I'll do my best to get these answered correctly - Just take them with a grain of salt because I'm not over the finish line yet!

1.  This for sure I know about - only compare comparable sales: Duplex with 4 bed 2 bath 1,800 sqft should be compared to other duplexes with 4 bed 2 bath and +/- 200 sqft of 1,800 sqft.  You can look at per door cost to make sure your numbers make sense, but my understanding is that the bank doesn't care.  2 - 4 units they look at comps.

2. NOI is for your use only. Assuming you are going for a traditional Fannie/Freddie loan, they will look at your personal income to qualify, but can use the income from the rental to help offset that income. Your primary focus should be on getting the house cheap enough so that your cost of purchase + rehab cost will be at 70% or less. SFR max LTV on cash out 75%. Multifamily max LTV cash out 70%.

3. No, this is not common. The reason why is that appraisers are, to quote Forrest Gump, "Like a box of chocolates, you never know what you're gonna get". You can have 5 appraisals and they will all be different. My personal philosophy is to put your money in when your have good odds of success, but be prepared for things to not work out. The best thing for you to do is run your own comps on the property you're buying. Have your agent run comps for you and compare. Ask the BP nation to look at these comps and offer opinions. Get as good of an ARV as you can get and then put the money in with the best of intentions. Worst case scenario, you leave a few thousand in the deal and still have a great rental that you bought for way less than full retail.

One more thing to keep in mind - In order to take cash out of a BRRRR using a Fannie/Freddie loan, you must wait for 6 months from the time your name was put on title until you can close the cash out refi. If you're expecting to get the cash back instantly, you'll need a different plan (portfolio lender, much more expensive).

Best of luck on your BRRRR adventures! I will be posting on my purchases once they close and things get moving, keep an eye out : )