BRRR with Multifamily?

15 Replies

I think I've only seen the BRRRR method explain in conjunction with SFHs. Does that mean multifamily homes don't increase in value after rehab, in comparison to SFHs? Does that mean the only way to do it is to find multifamily properties undervalued that does need any work?

In multifamily a very similar value add strategies are used. Multifamily properties are valuated based on the income that the property generates. If your renovations allow for higher rents (or possibly allow for sources of ancillary income), then the value of the property will increase proportionally. The neat part is that the value of the property will increase AND the cash flow will increase at the same time. That said, this works both ways. If you take over a multifamily property and somehow lower the Net Operating Income then you will destroy value and cash flow. 

As you begin digging into the commercial side of real asset investing, you will find that this method of valuation allows for more flexibility on the business strategy. I personally think it is pretty cool. Happy to help with any questions you may have. 

- JA

@Samuel Coicou

All commercial RE is basically BRRRR. Like others have said the name of the game is getting up the NOI to increase value. And unlike SFH that are valued on comps, the post NOI raise value of the commercial RE can be calculated.

It is done all the time. That is how I and many others have built most of our portfolio. I think you hear the term BRRRR with single families because the acronym originated from Brandon Turner, who did it on single families. People have been doing it on SF's, MF's and all other types of real estate for decades.

Multifamily is BRRRR on steroids. Instead of 1 unit, it's performed on 100s of units...and (1) it's usually manged by professional apartment management companies who specialize in re-positioning properties (2) the rehab is financed in the original loan and (3) the property continues to cash flow during the rehab (units are renovated as residents move out).

Hi Samuel,

The value of multifamily (5 or more units) is based on the net operating income. Increasing the revenue and/or decreasing the expenses as a direct impact on the value.

A common strategy is to purchase an underperforming multifamily, renovate the interiors in order to raise the rents, and refinance after a few years. So, yes. BRRRR works with multifamily. In fact, it is arguable that BRRRR works better on MF than SF.

Originally posted by @Jacob Avery :

In multifamily a very similar value add strategies are used. Multifamily properties are valuated based on the income that the property generates. If your renovations allow for higher rents (or possibly allow for sources of ancillary income), then the value of the property will increase proportionally. The neat part is that the value of the property will increase AND the cash flow will increase at the same time. That said, this works both ways. If you take over a multifamily property and somehow lower the Net Operating Income then you will destroy value and cash flow. 

As you begin digging into the commercial side of real asset investing, you will find that this method of valuation allows for more flexibility on the business strategy. I personally think it is pretty cool. Happy to help with any questions you may have. 

- JA

Thank for you indulging me. Your answer was exactly what I was looking for. I guess the only think left to answer is: How does one calculate the appraised value of a multifamily property? For example , if I found a duplex that has tenants that both pay $850 per month, what how much will I be able to pull out equity-wise? It sounds like you're saying it's based off my rental income as opposed to my equity and neighboring comps.

Duplex would be the same value as nearby duplex that sold in the area with same qualifications not just the rent. Best of Luck on your BRRRR.

Hello Samuel, 

A duplex will be valuated directly by comparable sold properties, not necessarily by NOI (as mentioned in my first post). From a lending perspective, anything 5+ units is considered a "commercial" property and is valuated on NOI. Anything below is valuated by looking at similar properties that are recently sold.

In your case, I would look for duplexes that were sold recently nearby. Get as many similar assets as possible. Average out a $/sqft and apply that to your target property. It always helps running things by your bank for an opinion as well. Keep in mind that if your market is similar to Houston, it is cooling off. Make sure you bake this into your numbers. 

All that said, it is possible to use the NOI approach to valuate the duplex if you are willing to look at it that way (I have seen this done before). I personally would not recommend it because you likely be overpaying for the property and will run into issues when securing a loan. It is also very unlikely you will get another investor to look at it that way when you exit the position.

- JA

@Theo Hicks dont they determine value based on NOI for two units and up? Ok my duplexes appraisal they used GRM, not sure the difference. Or how GRM works to begin with. Maybe there wasn’t enough comps in the area?

@Brian Ellis 1 to 4 unit properties are designated "residential" and the appraiser uses the sales comparison approach to determine the value. 5 or more unit properties are designated "commercial" and they use the the income approach (NOI/cap rate). I personally haven't seen the GRM used for appraisals. The three main valuation approaches are sales comparable (based on recent sales), income approach (based on the NOI and market cap rate) and cost approach (based on cost to replace/rebuild the property from scratch).

GRM, gross rent multiplier, is the number of years the property would take to pay for itself based on the gross potential rent. It is calculated by dividing the purchase price by the annual gross potential rent.

Originally posted by @Samuel Coicou :
I think I've only seen the BRRRR method explain in conjunction with SFHs. Does that mean multifamily homes don't increase in value after rehab, in comparison to SFHs? Does that mean the only way to do it is to find multifamily properties undervalued that does need any work?

multifamily BRRR is 100% my business model.