Does BRRRR work in commercial?

7 Replies

Hi BP, I am a new investor looking for my first deal. I have been actively looking for 2-3 family and have put in a few offers but nothing has gone through yet. I would like to start to focus on commercial properties such as mixed use/larger multi/retail due to their higher returns. I’m having trouble figuring out what to look for in this space. Should I be solely looking for distressed properties to rehab and pull as much cash out as possible upon refi? If this strategy isn’t as applicable to mixed use/retail, what value add components should I be looking for and if the strategy doesn’t apply, how can one grow their portfolio after the first property besides full private lending? Is there any way to pull cash out on these properties? In addition, how can you determine what you should pay for these properties? Is it solely on comparable cap rates? I don’t understand how this is viable because if I am looking at a million dollar property a small change of .25 in cap rate could change the estimated value by over 50k depending. How can you run comps when this small of a change can have such a large impact on value? Thanks! -Jason

The value of your commercial property is directly tied to the NOI. Increase rents & decrease expenses to increase value. Then refi or obtain a LOC based on the value.

@Jason Rosenbaum The cap rate is not a measure of risk not return. A small change in cap rate can affect the price of a property by 50k but that's the way the calculation works. Exit price is highly sensitized to a few factors, primarily, amongst them cap rates (if going strictly off the income approach). 

Valuing a property (or any asset for that matter) is done through one of three ways: 

  • Income
  • Sales comps
  • Replacement value

The BRRR strategy is just branding. It has been around forever.

What strategy you choose is dependent on your investment goals and objectives. For instance, if you are purchasing for yield, you might not want to invest into a property that needs a lot of repairs. But if you're looking for capital appreciation and income gains, then you would be best served repairing/rehabbing a distressed property. 

Word of caution: Refi out of a property is not as easy as most on BP claim it is. It comes at a cost (points, financing/origination fees) and might not always be available in your sub-market. It is best to plan to hold the asset without refinancing. If you do end up refinancing that's just icing on the cake.

@Omar Khan thank you for the reply. I am definitely looking for value add properties and cash flow. My goal is to gain financial independence through real estate. That being said, I have enough cash on hand for maybe 1 decent commercial property in my area. After one property, is my only option to grow to find private lending unless I wait a few years to accumulate more wealth? (I'd obviously prefer to grow quicker than that). Thanks again!

Originally posted by @Omar Khan :

@Jason Rosenbaum The cap rate is not a measure of

Word of caution: Refi out of a property is not as easy as most on BP claim it is. It comes at a cost (points, financing/origination fees) and might not always be available in your sub-market. It is best to plan to hold the asset without refinancing. If you do end up refinancing that's just icing on the cake.

To build on this point, yes you can BRRR commercial, but the seasoning period of lenders may be a full twelve months which discourages 6 month "flips"

Originally posted by @Jason Rosenbaum :

@Omar Khan thank you for the reply. I am definitely looking for value add properties and cash flow. My goal is to gain financial independence through real estate. That being said, I have enough cash on hand for maybe 1 decent commercial property in my area. After one property, is my only option to grow to find private lending unless I wait a few years to accumulate more wealth? (I'd obviously prefer to grow quicker than that). Thanks again!

Everyone’s goal is to gain financial independence 😊

Instead of trying to find one decent commercial property, have you considered partnering? This can allow you to leverage your different skillsets and get into bigger properties with (hopefully) better risk-adjusted returns.

Either way, you will hit a brick wall if you decide to go yourself (unless you’re very rich).

PM me if you want to talk further. 

Yes, commercial can be BRRRR on steroids.

Think about an apartment community with XXX number of units...it's XXX mini "flips" as you rehab and raise rents on individual units.  And, in most cases, the rehab is managed by the management company...and the property is cash flowing while this is happening.  My management company actually calls them "flips" rather than "turns" when a resident turns over and they go in an renovate and re-rent the unit at a higher rental rate.

@Jason Rosenbaum Commercial real estate can be a whole different animal, especially when you're talking mixed use, office, retail or industrial. Depending on which market you're in, it can take several months to over a year to get a new tenant. Acquiring a new commercial tenant can also be quite expensive. You may have to invest several thousand dollars into tenant improvements, and commission to brokers are based on the full value of the lease. if you do a 5 year deal at $2,000/ month, you're paying commission on $120k. Even if you dont use a broker for leasing, your tenant may have a tenant rep broker that you'll have to pay. I've seen people make tens of millions of dollars on doing the right CRE deal, but have also seen people lose everything from a deal gone wrong. Before getting into a CRE deal, know that you may have to sit on a vacant property for an extended period of time and be able to cover the cost of sitting on it vacant. The best way to make the brrr method work in commercial real estate is to have your tenant/user first, then buy a property to rehab and rent to them. If you spend a bunch of money rehabbing a commercial property before having a tenant, you may end up having to completely redo it to fit a tenant's needs. Create relationships with some local CRE agents, and when they have a tenant needing a space they cant find, do a deal with them to buy a property to fix up and lease to their tenant. Just get your lease signed first! With a strong credit tenant, you can get your financing with this.

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