Multifamily Investing: Knowing the numbers so you can BRRRR
Hey BP Family !!
I understand how to find the Noi, cap rate, price per door, and purchase price for multifamily. Where I'm getting stumped is knowing how much appreciation you forced from increasing rents and decreasing expenses to gain a new purchase price.
Example
Purchase: $1M
Down Payment: $300K (30% average)
Debt: $700,000
Units: 12
Cost per door: $83k
Rents: $1,000 per door (GOI = $12,000 per month x12 = $144,000)
NOI: $144,000 - $72,000 (50% for expenses is what I'm hearing) NOI = $72,000
Cap rate: NOI $72,000 / Price $1M = 7.2 cap
Let's say this is a value add opportunity and you're able to increase the rents by $200 per unit. Is that enough to BRRRR completely and pull all of your money back out? I appreciate all the help if you guys could go into DETAIL about your answer ! I'm not looking for a critique on the numbers, this is a very random scenario so I can get more comfortable with running numbers correctly and being confident I can BRRRR out, or atleast know what the value will be worth after renovations. I know this may be something simple to a lot of you but I'm having a brain fog moment and need help from the BP family !
All comments are welcomed if it pertains to helping me undersea nd my after repair value and what the bank would want me to be at after Reno
Love you guys !!
Omari - Under your scenario the Gross Rents would go from $144,000 to $172,800 (Post Renovation). And, if you're expenses were still the same 50% as well as the same cap rate (7.2) you're new value is (172,800 x .50) / 0.072 = $1.2M. Refinancing out at 70% would get you $840,000 (minus loan costs) on the refinance - so you would pay off the previous $700,000 loan and have what is left over to re-coup what investment/capital you made in the renovation.
All that being said, I think for a scenario like this in which you were interested in putting in a offer, I would not rely on the 50% rule to determine expenses and do a line by line item expense analysis based on historicals (from a T12 provided by owner) and the "proper" expense base. Similarly with the rent ranges - make sure you get opinions from property managers, online tools (rentometer, etc...) to see if your rental estimates are current. Lastly, the area cap rate is also important in all these scenarios. Try to find out what the area cap rate is by speaking to brokers and understanding what multifamily properties have been trading at in the area. Once you have better estimates of income, expenses, and cap rate you can be more specific with your NOI and value estimates before and after improvements. Good Luck!
@Greg Kasmer Everything Greg said plus make sure that you take higher property taxes into account based on an increase in assessed value reflected by your purchase price
