Disasters on Refinancing "R" of BRRR

[Dennis Nikolaev]

The glitch of REFI seams to be the most common problem in multifamily BRRR.

Imagine obtaining hard money and then not being able to pull out the equity from a repositioned project! Or grossly overestimating the After Repair Value?

Disaster.

I am getting ready for my first multifamily foray. I scrambled enough cash to buy and reposition my first Multifamily building.

I'm starting to really stress out as I see many people not being able to refinance their properties for various reasons. 

I wonder if there is a good way to predict the chances of refinancing? and predicting ARV?

How do you do that?

The idea I currently have is to show the final deal (before buying) to a mortgage broker and ask if such a property can be Refinanced after repositioning.

I'm just not sure if any broker would be willing to offer such advice.

So, how you predict future refinancing? ARV?

Dennis

[Josh Ridpath]

Depending on the number of units, your ARV is based primarily on stabilized income. When I am appraising a property like this for a bank, the appraisal presents 3 different values, as is (pre renovated), upon completion of the renovations, and upon stabilization.

Upon Stabilization: Stabilized Market Value (SMV) = NOI/Cap Rate

The tricky part about this is that since this will be a newly renovated property, there will not be accurate historical financials for an appraiser to analyze. The appraiser (or you for purposes of estimating your ARV) should survey other properties in the market to determine appropriate operating expenses for a property of your size and quality. Same goes for market rental rates and an expected vacancy rate. Operating expenses to consider when constructing your pro forma: Real estate taxes (based on your ARV not the in place assessment), insurance, maintenance (excluding CAPEX), utilities, management fees, payroll for onsite management (if applicable), admin/legal, advertising, security, and a reserve for replacement.

Upon Completion: Market Value Upon Completion (MVC) = SMV - Leasing costs and lost rent incurred to stabilize the property

Its not uncommon for there to be some pre leasing during construction process as units come back online. You will probably be left with some vacant units that will need to be filled post construction. You will incur costs and lost income during that time.

As Is: As Is Market Value = MVC - Renovation costs and some sort of entrepreneurial incentive

My advice: Befriend a property manager with experience in the market. They are a gold mine for comparable operating expenses and market rental rates for various neighborhoods. Be careful when analyzing cap rates in your market. Be sure to look at sales of properties in your market that are of similar quality to your renovated product. If you have a 10 unit, don't look at sales of considerably larger properties or properties under 5 units. These properties attract different debt structures which has a direct impact on your cap rate.