Does BRRRR work in commercial?

[Jason Rosenbaum]

Hi BP, I am a new investor looking for my first deal. I have been actively looking for 2-3 family and have put in a few offers but nothing has gone through yet. I would like to start to focus on commercial properties such as mixed use/larger multi/retail due to their higher returns. I’m having trouble figuring out what to look for in this space. Should I be solely looking for distressed properties to rehab and pull as much cash out as possible upon refi? If this strategy isn’t as applicable to mixed use/retail, what value add components should I be looking for and if the strategy doesn’t apply, how can one grow their portfolio after the first property besides full private lending? Is there any way to pull cash out on these properties? In addition, how can you determine what you should pay for these properties? Is it solely on comparable cap rates? I don’t understand how this is viable because if I am looking at a million dollar property a small change of .25 in cap rate could change the estimated value by over 50k depending. How can you run comps when this small of a change can have such a large impact on value? Thanks! -Jason

[Omar Khan]

@Jason Rosenbaum The cap rate is not a measure of risk not return. A small change in cap rate can affect the price of a property by 50k but that's the way the calculation works. Exit price is highly sensitized to a few factors, primarily, amongst them cap rates (if going strictly off the income approach). 

Valuing a property (or any asset for that matter) is done through one of three ways: 

• Income
• Sales comps
• Replacement value

The BRRR strategy is just branding. It has been around forever.

What strategy you choose is dependent on your investment goals and objectives. For instance, if you are purchasing for yield, you might not want to invest into a property that needs a lot of repairs. But if you're looking for capital appreciation and income gains, then you would be best served repairing/rehabbing a distressed property. 

Word of caution: Refi out of a property is not as easy as most on BP claim it is. It comes at a cost (points, financing/origination fees) and might not always be available in your sub-market. It is best to plan to hold the asset without refinancing. If you do end up refinancing that's just icing on the cake.