BRRRR'ing a Duplex/Triplex/Fourplex

[Isaac Fridmann]

Hey BP!

I apologize in advance since I'm sure this question was asked before but I can't seem to find any clarity. I'm trying extremely hard to acquire my first duplex. It is more than a dream of mine (cheesy, I know). My intention is to BRRRR the property so I can start building a portfolio. I've been hitting a roadblock when trying to analyze the deal. I will outline it below:

1) When trying to determine the ARV, what do you do if there are no duplexes nearby that sold?

2) Continuing from the first question, when trying to analyze what the rent will be after rehab, what do you do if there are no renovated comps?

3) If the goal is to BRRRR, do you need to take the current properties rents into account when analyzing?

I've watched a lot of Bigger Pockets videos on analyzing a BRRRR but the ones I've found haven't really explained how to come up with the ARV for the BRRRR. If you know of any other resources, I'd be extremely grateful.

I would really appreciate any feedback and am even open to paying if someone wants to jump on a zoom and do a live analysis of a property in my marketplace (I hope that doesn't violate any rules on this forum).  

Thank you again! 

[Brad S.]

Ok, the answer to #1 & #2 are:
As a 25+yr appraiser, if I have no nearby recent duplex sales or no renovated comps to comp out my Subject, I raise my assignment fee!

Ok, not the answer you were looking for, I assume, so here are other answers:

So, a good and experienced appraiser should have multiple techniques to approach this situation, which may help in evaluating a potential property.
* I would go back in time (sometimes years) to find any duplex sales, apply adjustments for any differences (size, condition, quality, etc), and then determine and apply any appropriate market trend adjustments (run a market trend analysis to see if there was an appreciating/depreciating values in the area of the comp/s, using linear regression or sale price/sf, etc). Obviously, this is somewhat technical and ways I need to approach it as an appraiser, but you could find a general source for market trends somewhere and/or apply an educated guess. Example: A duplex sold for $100k 2 years ago in your subject area and you find some general sources which state the local market has increased 15% in the past 2 years. Then you simply apply a 15% market trend adjustment to that sale, estimating it's current value around $115k.

* I would also look far and wide to adjacent neighborhoods to find any recent duplex sales and then assess and apply appropriate location adjustments. Example: you might find a duplex sale in an adjacent neighborhood which you determine sells for approximately 10% premium (higher appeal nhbd) than the Subject neighborhood, so you would assume a $100k duplex sale there would be worth about $90k in the Subject neighborhood.

* I would look for 3-4 unit sales in the Subject neighborhood and try to determine an adjustment per unit. Example: I might estimate a triplex sells for $50k more than a duplex, and therefore, generally assess a $50k value for that 3rd unit. Then if I have a triplex which sold for $150k, my duplex may be around $100k. This technique is not usually too accurate, in my experience, but can sometimes give you an idea, in areas lacking recent data.

* You can also use the income approach, although, it is not very reliable in 2-4 unit properties. But, you could determine a general GRM (gross rent multiplier- sale price/monthly gross rents) for the neighborhood (preferable similar type properties-duplexes vs duplexes, etc) and apply that to each unit's rents or potential rents. Example: estimated GRM of 100 x estimated monthly rents of $2,000 for both units, gives you a $200k value. This technique is also not usually too accurate, since grm's can fluctuate based on multiple factors. You can also apply this per unit. Example: You apply the grm of 100 to a $1,000/mth rent for a 2 bed unit, to estimate that unit has a value of $100k. Then if you find a recent triplex sale with a 2 bed 3rd unit (an additional 2 bed unit than the Subject), you can subtract $100k, to give you an idea of the duplex value.

* And for quality and condition, I would look for other sales, preferably 2-4 units, and try and find pairs with differing condition, to analyze market appeal. Example: You may find 2 recent triplex sales, one remodeled and the other not and analyze any sale price difference. I like to use % differences for this, like maybe a remodeled property sells for an estimated 5% more, etc.

Basically, you are looking for sales as similar as possible to your Subject, and attempting to "balance" or normalize them to your Subject, by adjusting for differences (remodeled vs original condition, duplex vs triplex, recent sale vs older sale, average neighborhood vs higher appeal nhbd, etc).  

Also, you mentioned determining rents for rehabbed units. You can use the same techniques for that, by widening your search for any rehabbed unit in any area and then try and adjust for differences. Example, you may find a rehabbed 2 bed unit in a quadraplex that rented for $1,100/mth and another 2 bed unit, not renovated, in a triplex rented for $1,000. That suggests a $100 difference for the rehabbed unit or 10% difference. Of course, that difference could be due to other characteristics also. And again, you can go back in time, to other neighborhoods, etc.

Yes, I know, it is not straight forward at all and can become more of an art. But, this type of situation may create more opportunity for an investor, since it is not as cookie cutter as many investors would like and they may not be able to recognize the nuances or opportunity with some deals.