Multi-family ARV calculation for BRRRR

9 Replies

I’m just getting my feet wet in multi-family and Value-add projects. Currently looking at numbers on two duplexes, and would love it if I could pull off the BRRRR, but don’t know how to assess ARV on multi-family. I believe it’s typically based off of income/rents, but my lender says that since these duplexes are vacant we can’t speculate what the rents will be. Therefore he would use past sales of other multi-family as comps. Past sales are pre-renovation prices, and none have popped up as flips since the investors hold them. So no past sale will provide a usable comp to substantiate the ARV. Numbers for 1 of these identical duplexes are below: $180,000 purchase (2580sf) $75,000 renovation $2800/month gross rents SF homes sell for up to $160/SF in this neighborhood The income approach would be... (2800*12*.75)/.08 = $315,000 (if I understand typical calculation correctly) Lender will do 80% LTV with 12 months seasoning. Thank you in advance for any information you can share!

"Since these duplexes are vacant we can't speculate what the rents will be." Sounds like malarky to me...determining potential rents in an area really isn't that difficult. Check out what others are renting for and talk to a property manager. They'll be able to tell you about what I can bring in.

Under 5 unit properties are considered residential, so to find an ARV you can just look at comps in the area with similar bed/bath/square ft and compare. It can be trickier if there aren't any with similar updates like you said, but you can always expand your search radius. Your realtor/property manager should be able to help you determine how much more buyers in the area are willing to pay for, say, a 3 bedroom versus 2, or granite countertops versus laminate. Talk with them and see if they can help assess what would be worth upgrading or not. But otherwise, everything you'd need to look at to determine ARV is discussed here:

https://www.biggerpockets.com/renewsblog/2016/04/29/ultimate-guide-quickly-estimating-property-arv/

For determining market value for 5 units and above you can look at this article too:

https://www.biggerpockets.com/renewsblog/2016/07/06/multifamily-real-estate-value/

Good luck with your purchase! We have a SFR in Edmond :)

Thanks, Cory! After posting this I found some other helpful posts which are in line with your guidance.

That’s awesome that you have a SFR in Edmond all the way from Ohio. Let me know if you ever need any OKC input from a local!

@Carter Still sure thing! I lived in oklahoma for 8 years (which is how we ended up with the house in Edmond) and moved to Europe last October. We’re managing that property from afar and purchasing more rental in Ohio (where I grew up). So far so good! 

@Carter Still

I agree with @Cory O'Dell .  Rent potential is relatively easy to determine by asking enough realtors/property managers in the area... and Rentometer.com is a helpful starting point. Once you find a good prop manager and RE broker connections, you can lean them heavily for current rent and max rent potential after upgrades.

 Are you purchasing with a traditional down payment and then aiming to cash our refinance after you stabilize it?  Or cash up front? 

For a duplex (as Cory said- up to 4 units), your lender's appraiser is going to lean on the comparable sales approach and not base the value on income.  We recently acquired 6 units in Oklahoma City that are adjacent triplexes.  We financed them with longterm residential loans as (2) separate triplexes. Even though the recent comps are limited, current income had very little weight in the value determination.

On a side note- BRRR can get a little tricky for SFRs and small multi family properties if you are holding for a long time before cashing out. In larger multi families, you have more control in creating the new value by increasing income and reducing expenses but in the smaller residential properties, you have more liability to a market shift or a bad outlier appraisal. One strategy we've used to combat this with SFRs and to reduce our risk exposure is Delayed Financing Exception to avoid the standard seasoning requirement. We purchased in cash, rehabbed, and refinanced within 2 months of purchasing. DFR is likely not a good option for the specific property you have above because your max refinance amount is purchase price+ closing costs... so extensive rehab BRRRs aren't a good fit. But just something to think about for future props that meet the criteria.

There are lots of great posts about DFR on BP but below is a good starting point.  

https://www.biggerpockets.com/blogs/5110/42824-all...

@seth_marcus wow, that’s extremely helpful information, and I’m happy to hear it from another OKC investor! Thank you so much.

To answer your question, we are doing 5 yr fixed commercial loans with 20% down on purchase and 100% of reno financed (so long as the as-complete appraisal agrees with our reno line items).

I have never heard of the “delayed financing exception”, but that is powerful information. It would be a game changer to get around the seasoning and refi or just finance the cash investment as soon as it is completed.

Thanks again for the thorough and helpful response!

Howdy @Carter Still

They covered the subject pretty much.  So let me at least help you with the tagging function.

Type the” @“ symbol, then the first three letters of their name “Joh”

A small pop up window  will appear with a single or multiple images with the person’s name.

Click on the image and that name will be inserted.

Then hit Return.  The entry will show up in blue text.  They will be tagged.

Your done.