BRRR.....?

Question

About a year ago I purchased a seven unit property in a good neighborhood, however the property was in horrible condition. I have since evicted the trouble makers and completely renovated the units along the way. My rents have increased from $500 p/month to $700 per month in each unit i have renovated. I have two units left And my rehab will be complete however I am left with very little capital to continue investments with (down payment + rehab costs for 5 units). The complex cash flows $2,500 per month which is fantastic however I have just learned about the BRRR strategy and need advice. I purchased the property for $200k and had to put $50k down. My rehab costs are right at $7k per unit and 5 needed renovations ($35k). My total out of pocket is $85k. From my understanding, it being 7 units, the property is appraised based on NOI/Cap rate. Local Cap rate is 8% for Panama City, Fl. With that math I am seeing that my property should be worth $280 -$300k when I am finished and fully occupied. My question is this: Do I need to have my property rented at the increased rent for a full 12 months before I try and refinance to pull cash out? Or will the bank use market comparables and refinance after an appraisal. Appraisals on commercial property cost between $2,500 and $3,000 so I do not want to spend that kind of money if the appraiser is going to check my tax return and see a huge list of expenses and vacancies because of the construction. Any help would be greatly appreciated. Ramsey

Korie Apgar · Answer

@Ramsey BlankenshipAppraisers do look at cap rate for the area as well as take a look at your leases. When you're bringing in 700x5= $3500 month you could get more than 300000 appraised value. Could be towards $350000. But remember if you need to sell, no investor will pay that unless they are a full price paying investor, which wouldn't be an investor. Helps for equity. Keep your money snowballing!!! Oh, and your appraisal shouldn't be that much. I wouldn't expect to pat more than $900, $1000 tops!!!! Get quotes. Don't forget when you refinance you'll need to pay closing costs.

Brent Coombs · Answer

@Brian G., remember, all up it's only cost him $235k (including his $150k mortgage). Which means that a refi @ $245k gets him ALL his $85k cash back (with a $10k buffer)! THAT'S how it's done!...

Brent Coombs · Answer

@Ramsey Blankenship, it looks to me like you're being a bit too conservative? eg. the allowance of 45-55% for expenses would normally INCLUDE vacancy, not requiring you to subtract further!So, if your expenses including vacancy range between 45-55% gross rent, your NOI would range between $25,785 - $31,515 (at 8% cap, building appraises between $322,312 - $393,937)!Looking better for your BRRRR strategy, providing those numbers ARE realistic! Cheers...

Sam LLoyd · Answer

My mortgage broker says that 6 months is a good amount of time after purchase.... that way it is more believable that you have affected improvements... but in the end, proving that you've done the improvements is what counts... even if it's less than 6 months. What you need is justification for the new value.... ie: appraisal. Having before and after pictures is a big plus, as well as receipts for material/work done. If you have to wait a year for the higher income to hit your tax returns, that works too... but you're also going to want your rehab to go against the income, so your taxes won't look that good.

Brian Garrett · Answer

You're 100% correct I had a brain fart and calculated the mortgage at $200k (purchase price) instead of the $150k (mortgage payoff) by accident. Sounds like a great position for BRRRR!

Brent Coombs · Answer

Depending on what percentage your commercial Lender will loan you against their new appraisal, the usual 70% means that you wouldn't get all your original $85k back at refi. Even at an appraisal of $300k*, you would only qualify for $210k total, which is less than you have into it (including current borrowings). Do you see where I'm going with that thought? All the best...*Are you sure you've extrapolated its proper worth at an 8% cap rate? How did you calculate NOI?

Doron Nissim · Answer

Hi @Ramsey BlankenshipSounds like you have been investing a lot of time and money in this property.from my experience you don't need to wait until the property is fully occupied and you can pull cash out after 6 months. it is really up to the bank you are going to do this refinance.i have had mortgage brokers telling me i need to wait 12 months just did a refi cash out after 8 months.. so its really up to whom you're dealing with..also about the appraisal.it is true that the market price for commercial appraisal is $2500-$3000but i after some research i have found someone locally that did that for $900..the appraiser will ask for current leases what have happen in the past doesn't matter because you fixed the property and have new tenants. you can also ask a local broker to do a BPO .. this will cost you about $150 and can give you a rough estimate of how much your property worth..hope i helped good luck!

Brian Garrett · Answer

Remember he still has to pay off the original loan out of that $245k. With that being said I had a brain fart before and calculated using the $200k purchase price instead of the $150k mortgage.

Jorge Ruiz · Answer

Brian G. If Ramsey Blankenship is only $85K out of pocket and he gets $245K with the refinances how is he losing? I'm trying to learn this strategy. If you could help me see something that I'm missing I'd greatly appreciate it. Thanks.

Brian Garrett · Answer

Hey Brent where am I wrong in my math here? Even if it appraised at $350,000 for argument sake and he wanted to cash out refinance at 70% LTV that would only be $245,000 which is still significantly less than what he has into the property. Doesn't seem like it fits the BRRRR strategy very well since he'd still have a lot of money tied up in the deal. Am I missing something?