BRRRR'ing commercial properties

Multi-Family and Apartment Investing
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BRRRR'ing commercial properties

Account Closed
Accountant · Brainerd, MN · Member since 2017 · 17 posts · 11 votes

My wife and I looking at a 16 unit motel and converting away from traditional motel operation and towards STR Airbnb each unit.

I've read enough books and have enough education to know on paper how the commercial refi process should work.... increasing NOI at a given cap rate to drive up valuation.

But none of the books and education really dive into the nitty gritty of what is basically commercial BRRRR.

For example... upon cash out refi, I am assuming most lenders will require a formal business appraisal. It is easy for us to value using NOI and cap rate for the given market. But how will that differ from externa business valuation? Any insight?

And what about time lines... will most lenders (or appraisers) require a certain number of years of financials to qualify the increase in NOI?

And is there any consideration given to property improvements and market conditions or is it all 100% financially driven in the commercial world? 

Just looking for some of that real world knowledge that may get missed in a book. 

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      Andrew PostellPro Member
      Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
      5y

      @Account Closed doing this technique on an apartment complex is pretty common but doing it on a hotel/motel is a bit less common.  However, just to provide a reference point, most lenders would want a 2 year history of income on a commercial asset to asses the value of the property.  So a commercial "flip" is usually a 3-4 year turn time because of that 2 year history that is required.  I hope that makes sense how I am describing it.

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      • Andrew PostellPro Member
        Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
        5y

        @Account Closed doing this technique on an apartment complex is pretty common but doing it on a hotel/motel is a bit less common.  However, just to provide a reference point, most lenders would want a 2 year history of income on a commercial asset to asses the value of the property.  So a commercial "flip" is usually a 3-4 year turn time because of that 2 year history that is required.  I hope that makes sense how I am describing it.

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      • Salvatore Lentini
        Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes
        5y

        @Account Closed - most commercial appraisals will do a combination of sales comps and income approach.  And depending on your population density, the area they draw from can be pretty large.  It's not like residential where they pull from within 1/4 mile.  They can use comps from several towns away.  I always laugh when I see the comps they pull.  I would try and find some similar properties for sale yourself to get an idea of what kind of cap rate or rent multiplier those types of properties trade at.

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      • Account Closed
        OP
        Accountant · Brainerd, MN · Member since 2017 · 17 posts · 11 votes
        4y

        @Andrew Postell & @Salvatore Lentini - I greatly appreciate the insights. Both are quite helpful. This property is still available (way over priced) so that will be hurdle number one. 

        And hearing "a commercial 'flip' is usually a 3-4 year turn time" is helpful. It is what I kind of assumed based on my limited experience in RE and knowledge about banking. 

        Thanks! 

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      • Matthew CrivelliBusiness Member
        Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
        4y

        Anytime you buy a large commercial multi unit, rehab loan or a long-term commercial loan you will need to have a full commercial narrative report in order to close. The appraiser like others have said will use a combined approach and it will have a ton of detail on the surrounding area and the current market conditions and trends. Usually these reports are 50+ pages and you need to allow yourself 45 - 60 days to get to the closing table. If you were to buy one for rehab purposes you could get in the door with only 20% down and a lender funded rehab which is nice but it defiantly takes time to close. 

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      • Matt Horn
        Investor · Tucson, AZ · Member since 2020 · 15 posts · 10 votes
        4y

        I like the creative thinking to re-purpose the property! I would say that the best thing you can do is to have a dialogue with your lender(s) to learn how they feel about Airbnb income. Most banks that I have spoken with are not comfortable with the uncertainty of rents. They strongly prefer the predictability of the long term leases that provide stability and capacity to repay the loan. They often times will look at the short term rentals as a transient/hotel type of underwrite and then either steer clear from it entirely or offer a lower LTV than you maybe seeking.

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