Is BRRRR risky with duplexs?

Question

I'm working on BRRRR deals in Fort Worth, TX.

Renovating distressed SFRs into duplexs (in zones that allow it). These areas are still vastly SFR. From what I'm seeing it looks like a duplex is generally valued lower than a SFR. Sometimes dramatically so. Though I can't get exact comps of the areas I'm looking at.

Is this something I should be worried about when getting to the Refinance "R" in the system?

The rental income is obviously better and with more risk mitigation on the duplex side.

Does anyone have experience with this?

Thanks!

Lee Ripma · Answer

@Dori Arazi

You can get a Commerical loan on any property, even a SFH. The rates and terms are less favorable but the loans are also for investments and don’t have all the requirements that RES loans do.

Nicholas Covington · Answer

@Dori Arazi

Mortgage broker out of Fort Worth here. I focus a lot of these types of refinances and the key thing is just knowing your numbers for ARV.

Wether the duplex is valued higher or lower does not really matter. The key thing is knowing that you can get back what you put into it. Cash out refinancing is normally max at 75% so if you believe that would not be enough to get back what you want then you might want to re evaluate the actual deal.

Send me a PM and we can chat specifically about the program in detail for your BRRRRs

Dan H. · Answer

In my market duplexes to quad are priced lower than similar SFR which is why their cash flow is superior.  A 3/1 SFR may appraise at purchase at $420K but a detached duplex with a 3/1 in similar shape same area and 2/1 may appraise at $460.  In effect you are getting the 2/1 for $60K.  You need to know the value of the duplexes in your area.

In addition, in my market refinance appraisals are very conservative (i.e. low, lower than purchase appraisals).  For our BRRRRs, the biggest risk has been the refinance appraisals; bigger risk than unexpected findings during the rehab.  One of our appraisals was so low that I got an $80K upper on appraisal appeal and still believe the appraisal was ~$40K lower than an appraisal that would have been associated with a purchase.

I do not know that your market is the same as our market, but I think you need to educate yourself on the value that you can expect from the refinance appraisal.  Without knowing what to expect from the refi appraisal, you are taking on a large risk item.  Large risk items can make an investment fail.

Good luck

Lee Ripma · Answer

@Dori Arazi

Are you going to refi with a conventional lender or a Commerical lender? A Commerical lender tends to favor the income approach over the Comp approach. So if a duplex is lower value based on comps but worth more or equal based on income might work out. I will only tell you that I had a terrible time doing BRRRR and refi with conventional lenders. Once I switched to refi with Commerical it worked.

Dori Arazi · Answer

@Lee Ripma, that's good info to know. Thanks.

Dori Arazi · Answer

Thank you for the reply everyone, this is very helpful.

@Lee Ripma, wouldn't a commercial lender consider financing a deal that's only 5+ units? I've worked with commercial loans very briefly, but I've noticed their terms are far less favorable (Higher rates, no ability to lock down terms, etc.). How did you get around that?

Thanks again,

-Dori

Is BRRRR risky with duplexs?

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