Good time for BRRRR?

Question

Hey BP,

I've been looking for small multifamily deals in my area but prices are way too high compared to the rent potential of the area.  So, I've decided to look at doing a single family BRRRR instead.

Question:

With the rising rates and price drops that are currently happening, how would you go about estimating ARV for a potential BRRRR deal?  Is this still a good time to use the BRRRR strategy?

The last thing I want to do is miscalculate the ARV and be stuck underwater on a property.

Thanks in advance for your time and advice!

Caleb Brown · Answer

I would look at what's sold recently and pending(within 60-90 days). Maybe adjust it 3-5%. I would have a relationship with an agent to get a pulse on the market. In my market we aren't seeing a drop in price more of a slow down in activity. Obviously things could change in 3-6 months when you refi

Michael Zane · Answer

@Greg Larson, estimating ARV is a combination of art and science.  Regardless of whether the market is strong, weak, or somewhere in between, estimating ARV can be challenging.  To your point, you don't want to overestimate ARV and lose money on a deal you buy, but there is also the risk of underestimating ARV that could cause you to pass on deals that are actually viable.  If you're struggling to find the data necessary to estimate ARV or want to understand local market trends better, the best thing you can do is find a local, knowledgeable, and investor-friendly real estate agent to help you.  You'll find that many are happy to offer some input as an act of goodwill.

The interest rate environment and local market condition doesn't really make estimating ARV harder or easier.  It's all about having the right data and keeping a pulse on the market.  The first and probably biggest hurdle to making BRRRR a viable strategy is being able to estimate ARV with a reasonable level of accuracy.  If you can do this, then the BRRRR strategy becomes an option regardless of geography, market conditions, or interest rates.

Jeremy Hunter · Answer

It's always a good time, if the numbers work. What numbers work depend on market conditions. Rates are what they are so that's part of your calculation. Based on the running assumption the fed will raise rates another .75-1% in the next few months, expect mortgage rates to follow. So I'd use a refi rate estimate 1%+ higher than current rates to be safe. Rehab costs are what they are so that's the 2nd part. I THINK those will start to soften as material costs and demand are coming down some. But don't count on it. The ARV is always a moving target in any market. But with things softening in many areas it certainly is more important to be conservative here. Over the past 5+ years you could be off 5-10% and still be ok because it's very likely the market moved up 5-10% in the months the rehab took. Those days are likely over, and that isn't a bad thing. Again, it just is.

Figure out what your numbers are and what you can offer based on those numbers for it to work. If offer is accepted great! If not move on.

Having been in real estate since 2000 I've done up, down, and relatively flat markets. The plus side of a softer market is you are likely to have more properties to choose from and lower offers will be appealing to sellers who haven't seen any offers after 30 days on market, which rarely if ever happened in the craziness of the last few years.

Figure out what your numbers are and what you can offer based on those numbers for it to work. If offer is accepted great! If not move on.

Having been in real estate since 2000 I've done up, down, and relatively flat markets. The plus side of a softer market is you are likely to have more properties to choose from and lower offers will be appealing to sellers who haven't seen any offers after 30 days on market, which rarely if ever happened in the craziness of the last few years.

Michael Zane · Answer

@Greg Larson market values (ARVs in your case) are always a moving target.  That's what makes real estate investing so much fun!  A few thoughts:

I would not recommend looking at comps more than 6 months back, and truthfully I would stick to looking no more than 3-4 months back to capture the period of time when interest rates began to increase.

This is where the art of estimating ARV comes in - you might look back 3-4 months, but then you'll want to adjust your ARV estimate for future expectations.  Speaking with a knowledgeable, local agent can be a big help here.

If you're willing to spend some money upfront, you might also consider hiring an appraiser to write up a report.  You can explain that you're most concerned with the ARV, rather than the pre-rehab value.  The appraiser should be able to adjust the valuation assumptions based on your guidance.

While you're at it, you should be studying rental comps too.  This is critical to pull off a successful BRRRR.  Again, having an agent who can provide MLS data would be a big help.

Luther Wilson III · Answer

Yeah, @Greg Larson, jump in there.  If you can get into a good deal utilizing creative financing, in my opinion, that might be the best option right now but next up for me is a BRRR.  Location is super important, having access to additional private capital is very helpful, and having realistic expectations about how much you’ll cash flow and how much you could have left in the deal (built in equity) - all are keys and things to be mindful of, especially as things are shifting - if you do decide to go forward with a SFH BRRR deal.   Project size is another thing too…  I’d much rather take on a deal with a smaller spread and less built in equity, if I can get into and out of the renovation faster and if the location is better - than I would a larger renovation project, on a lower price point property in a not-as-nice area, with more “potential” built in equity.  I hope you get the idea.  You get to choose - based on your access to capital and risk appetite.  Cheers!

Nick Belsky · Answer

@Greg Larson

Interesting post and interesting responses.

At the end of the day, if you are financing the purchase/rehab, the lender is going to require an appraisal and the Scope of Work and Budget you put together is going to be given to the appraiser.  They will determine the current and future value of the property.  They will tell you what your ARV is and the lender is going to use that ARV to base the ratios of your loan from.  It is important to get the ARV somewhat accurate, but it doesn't have to be perfect.  If you are running on razor thin ratios, it may not be a good deal to begin with.  Leave some fat on the numbers and if the appraisal comes in a bit low on the ARV, you still have a good chance of getting the financing.   They will tell you the current and future Fair Market Rents too.

The largest problem I see BRRRR investors running into is the temp to perm financing for those that plan to lease and hold.  If this is in your plans, be sure to have a perm lender lined up too and know what their seasoning requirements are and how quickly and how long you can lock your loan ahead of time.  I am often bailing BRRRR investors out on the perm financing due to not planning ahead properly.  Many of them are repeat clients for me now and they don't have to stress about financing for either part of the process.

Planning is everything, but plans change.  Never a dull moment in REI.

Cheers!

Greg Larson · Answer

@Michael Zane thank you for the advice!  This helps a lot

Michael Scott · Answer

Hey @Greg Larson I would echo others here in saying that you need to have an agent that intimately knows your target market. At least when your just getting started and learning. They would know the trends and how to comp your subject properties. They should even be able to help you understand how to pull your own for a quick analysis.

With regards to interest rates and timing, now is always the best time to get started. Continuing to wait "until the market corrects" is just an excuse not to start. If you're worried about rates be conservative about the rate when analyzing a deal. It should always be baked into your numbers. Best of luck!!

Greg Larson · Answer

@Jeremy Hunter thanks for your advice.  As an investment buyer and someone who needs to put a new roof over his own head, I welcome the market softening with open arms lol

Greg Larson · Answer

@Caleb Brown will do.  I will ask my agent to send some data on what the market has done since the fed hiked rates.  My view is/was that prices would be dropping nationally, but I'm now seeing that that is not necessarily the case in all markets

Good time for BRRRR?

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