BRRRR in MFH with tenants

3 Replies

When people buy rehab and refinance a partially occupied MFH, do you refinance immediately after you rehab the exterior and the vacant units and rent it out? Or do you rehab all units, vacant or occupied (when their lease ends), and then refinance?



There are many reasons to refinance, some are: 1) to replace a hard money loan, 2) replace another conventional loan with better terms, 3) replace a maturing loan with balloon (similar to #2), 4) consolidate multiple loans into one, 5) pull out some equity after slow growth, and 6) pull out some equity after adding value for quick growth.

In most every case a traditional lender will want to see that the property is "seasoned" -- that is the vacancy and rents have been stable for 9 months to 2 years. This proves that the NOI is stable and therefore the valuation makes sense for them to lend against. Most lenders will only give 70% to 80% LTV.

Considering the above, to get the highest valuation possible it makes sense to complete all repairs, get the vacancy as low as possible, and wait until close to the end of the required stabilization period before refinancing.

I'm just looking to get into investing, and I'm trying to compare the BRRR strategy for SFR vs MFR.

Is this stabilization period something specific to MFHs? For SFR I was under the impression that as soon as I rent out the house I can refinance to pull out the equity.

Hypothetically speaking, if I buy an older MFH with 50% vacancy, even if I rehab the vacant units and rent it all out, I still have to wait an year for it to stabilize before I can refinance?

Also does the reason for refinance matter? For me I'm just planning to buy and rehab with cash, and then refinance to pull out the equity.



@Ray Li @Scott S.

@Ray Li, the answer depends on the lender. Generally speaking, with me, 90% occupancy for 90 days is considered stable and ready for refi, but I’d need to know the whole story.

The amount you cash out depends on how soon and what you’ve done to the property.

If you purchase a multifamily property and improve it by spending money on capital improvements, increasing rents and occupancy, you can typically pull anywhere between 80-90% of your total cost within 12-24 months – at least in my space, multifamily loans between $1 to $6 million.

To piggyback off of Scott S. comments, the more seasoning you have the better. Now every transaction is different and you may be able to refinance much sooner if there’s a good story to your transaction. What size is your anticipated loan request? What’s the story with your transaction? Was the property poorly operated but in a good submarket? How much have you spent in capital improvements? For multifamily loans over $1 million, stable is considered 90% occupancy for 90 days. Some lenders may want to see more but with me, 90% for 90 days with a good story is doable. If you can demonstrate 90% occupancy for 90 days, and you’re numbers are in-line with the sub-market, you should be able to refinance.

You will have to show lenders…..

- Why was the property poorly performing before you acquired it? Is it the submarket, the operator or both? If it was a poorly managed property in a good submarket, and you’ve improved the property, you can typically pull cash out.

- How much did you spend on capital improvements? Document all of your capital expenditures as this adds to your cost basis and demonstrates you care about the property. Document how much you spent, on what it was invested and when it was spent? Be sure to separate non-recurring, capital improvements from operating expenses. I can’t tell you how many times I’ve seen non-recurring expenses mixed with recurring expenses. This impacts your underwriting. If you perform capital improvements in-house, keep detailed records as to the labor hours and supplies and separate those from your operating expenses. I can’t stress this enough.

- Keep detailed records of the monthly occupancy and collections from the moment you purchased the property. When it comes to collections, you want to document (1) asking rents, (2) loss-to-lease, (3) physical vacancy, (4) concessions, and (5) bad debt / write-offs. This will determine your economic occupancy, which is looked at closely.

PM with more questions as you get closer to identifying a multifamily property for purchase