One of the best ways to build your rental portfolio is through the BRRRR strategy (buy, renovate, rent, refinance, repeat). Many factors are important to be successful at this. A source of capital is needed to fund the purchase and renovations, a reliable contractor is needed to do your renovations, and a banking relationship is needed to provide the take out financing.
Along with all those things, the refinance phase can be a deal maker or breaker. The key to that phase is getting the right valuation so that you can recoup your capital and repeat. Without a good value at the refinance phase, you will be left with some of your capital tied up in the deal, which will prohibit your buying power on the next deal. That’s not sustainable. At some point, you will run out of capital if you have to leave some behind on each deal.
I always look for sustainability in my business, which means doing profitable activity that I can do over and over again. I came up with three keys to getting a good value at your refinance so that you can have sustainability in your business, repeating the process over and over again with the same capital.
Once you have a banking relationship in place with a lender that will fund your deal, the pivotal point in the refinance is the appraisal. To ensure you get the right value, consider the following three tips.
3 Tips for a Successful Refinance
1. Make sure the income approach is used.
Most appraisers use what’s called the “market approach” on an appraisal. This is looking at the local real estate market for completed sales within a specific timeframe to determine value. Real estate slang for this is “running comps” or comparable sales. Things like distressed sales and bank auctions can pull down the market value unfairly. The sales they are comparing your property to may also not be as profitable. The income approach factors in the profitability of the deal, looking at the net operating income (NOI) and applying a cap rate to come up with the value. If you deal is a good one, the income approach will typically show a higher value than the market approach.
2. Break out your construction costs.
You want to make sure the bank and appraiser see that you did significant work on the property to increase its value. The best way to convey that is to show them a detailed scope of work for your renovations. A bid from a general contractor with pricing and lots of details included is a good start. If you did any work on the property yourself, be sure to show some value for that. We also include a construction management fee on our deals to compensate us for our oversight. This fee could be taken as a payment or contributed as equity in the deal, but we make sure to show the dollar value in our budget.
Related: How I Bought, Rehabbed, Rented and Refinanced 14 Properties at Once
3. Make sure to attend the appraisal.
You know where the value is in your deal. You know the key points that should be considered in a refinance, and you know all the work that was performed better than anyone else. It makes sense for you to attend the appraisal to ensure that the deal is presented in the best light.
In today’s video, I go deeper into these three tips and teach how to make sure you get the best value on your refinance so you can have a sustainable business model moving forward.
I hope you enjoyed! If you have some tips on refinances or the BRRRR strategy overall leave them below!
It would be great to have a discussion with you on the topic. Have a great and profitable week!