BRRRR Doesn't Always Require Rehab

[Denise Evans]

The first "R" in BRRRR is for "Rehab." It's a handy acronym, but don't let it structure your thinking. You want value-add property you can Buy, Add Value, Rent, Refinance and Repeat. When you think Value Add instead of Rehab, you allow yourself to think more creatively.

It is not always distressed properties that create opportunities, although that's a great strategy all by itself. Think also about:

Distressed Revenues.  Properties rented significantly below market because the owners are afraid to raise rents or emotionally attached to their tenants and reluctant to raise rents or maybe just ill-informed.  Getting rents up to market adds significant value.

Distressed Owners. Foreclosures, tax sales, heir property, divorce, out-of-state owners with bad local management, many more.

Distressed Market Intelligence.  I live in Tuscaloosa Alabama, home of the University of Alabama with 40,000+ students and still growing. Some parts of town that used to be predominantly low income are changing to student housing.  Student housing brings higher rents and parent guarantees, making it more valuable. Despite that, many owners are still selling on low income tenant assumptions to evaluate a (low) asking price.  Some apartment communities are D- properties in B+ or better locations. Finding the opportunity and partnering with an equity partner who can pay for the rehab allows both of you to share in refinance money but without any rehab expense by you.

Get out of the "rehab" straight jacket and find many more opportunities!

[Denise Evans]

@Eric Miller For a purely commercial property, the appraisal is primarily a capitalized income approach based on the rents and the expenses. If you can get the rents up, and the expenses down, you increase the Net Operating Income, which increases value. On a property with $24,000 a year in NOI and a market cap rate of 8.5%, and a rent increase of $50 per month and a savings of $1,000 a year by increasing your insurance deductible, you will add $18,824 of value.

If you can reduce risk, such as having all tenants with significant time remaining on their leases and all with security deposits, that will often decrease the cap rate, which increases value. Cap rates are related to market interest rates and to risk. If you can reduce the risk of near-future capital expenditures, such as replacing an older HVAC or roof, that also reduces the cap rate which increases value. A $10,000 capital expense for a brand new HVAC unit does not count as an expense for purposes of calculating NOI. It can result in a cap rate reduction. If the cap rate goes from 10% to 8.5% on a property with NOI of $24,000 a year, then the increased value is $42,353. Well worth the $10,000 expense.

For SFR, appraisers generally look to see the character of the neighborhood. They will then do a psf analysis based on comps, and a capitalized income analysis. In the reconciliation, if the neighborhood is predominantly rental, they will lean more heavily towards the capitalized income value when doing their reconciliation. If the neighborhood is predominantly owner/occupant, they will lean more heavily towards the psf valuation when doing their reconciliation.

If the property is a rental property but vacant, they will accept comparable rents as long as you can substantiate the properties and locations really are comparable to yours.