Forecast ARV on BRRRR

6 Replies

Hello All,

I am looking to find my first BRRRR property and will be using Hard Money. I am trying to determine my current buy price based on my ARV. I'm a newbie and need some clarification: is the ARV calculated with actual expenses from prior 12 months or is it a predetermined formula such as the 50/50 that underwriter's use?

I may be overthinking this but I believe the 50/50 is just a quick generalization and the actuals will be more consistent with the ARV. I am actively searching deals and I am finding many properties have understated expenses. At most I have seen 30% in a C multifamily market in CT.

I understand the cap rate and the NOI determine the ARV, however, I am learning it's easy to manipulate numbers to make a property appear to be a better deal. Can someone please clarify the ARV and if I should base my ARV off 50/50 or actuals listed on MLS.

Thanks,

Matt.

@Matthew Lahickey

You mentioned class C multifamily with NOI and cap rate valuation and towards the end you also mentioned MLS list prices. These are two different valuations of different property types, one is commercial the other is residential. What type of property are you dealing with?

Single family homes, duplexes, triplexes and fourplexes (i.e. 1-4 unit properties) are residential properties and they are normally valued using 'comps', so ARV should approximate the sales prices of recently sold comparable properties in the area (i.e. comps).

5 or more unit properties (aka apartments) are commercial properties and they are normally valued using the income approach (i.e. market cap rate and NOI), so ARV should approximate the cap rate valuations of recently sold comparable properties in the area.

Cheers... Immanuel

Originally posted by @Matthew Lahickey :

Hello All,

I am looking to find my first BRRRR property and will be using Hard Money. I am trying to determine my current buy price based on my ARV. I'm a newbie and need some clarification: is the ARV calculated with actual expenses from prior 12 months or is it a predetermined formula such as the 50/50 that underwriter's use?

I may be overthinking this but I believe the 50/50 is just a quick generalization and the actuals will be more consistent with the ARV. I am actively searching deals and I am finding many properties have understated expenses. At most I have seen 30% in a C multifamily market in CT.

I understand the cap rate and the NOI determine the ARV, however, I am learning it's easy to manipulate numbers to make a property appear to be a better deal. Can someone please clarify the ARV and if I should base my ARV off 50/50 or actuals listed on MLS.

Thanks,

Matt.

Matt, yeah - 30% is too low. Even for A buildings in A areas, 30% of income as expenses is low - I've seen actuals like 35% for A properties in A areas.

50% is a good rule of thumb.

Now, having said that, if you are FORECASTING the ARV or the Value, then going with the current NOI is NOT the right way to do it.

Can you add value through bringing in higher rents as a result of putting in higher end finishes?

For example, a 10-unit building rented for $600/mo in a B area (say at a cap rate of 5%, and assuming 50% expense ratio) is valued at $720,000 today. However, if you can put in $5,000/unit in improvements and raise the rents to $750/mo, then the future value is $900,000.

@Immanuel Sibero , thank you for the reply. I’m looking at commercial, 5 units and above. I. This example I found a property listed at a selling price for $383k. Gross income is $64200 but expenses are only $19788. Cap is 11.6. Now if the expenses are true it would be valued at $383k, however in my equations if the expenses were 50% the house would be $249.

Hence why I’m asking about Arv. It could be two drastically different figures. This particular home is renting at an average of 890 with average rents in a 5 mile radius of 1150.

Originally posted by @Matthew Lahickey :

@Immanuel Sibero, thank you for the reply. I’m looking at commercial, 5 units and above. I. This example I found a property listed at a selling price for $383k. Gross income is $64200 but expenses are only $19788. Cap is 11.6. Now if the expenses are true it would be valued at $383k, however in my equations if the expenses were 50% the house would be $249.

Hence why I’m asking about Arv. It could be two drastically different figures. This particular home is renting at an average of 890 with average rents in a 5 mile radius of 1150.

I think you're on the right track. I agree with 30% expenses are most likely too low. The use of these percentages to estimate expenses are just that, estimates. It's good for a quick back of the envelope figures, but at some point you would need to get the actual NOI (i.e. last 12-month), scrutinize each expense line, make sure all expenses included and none are understated (i.e. est. vacancies, property taxes, insurance). The same can be said with rent revenues.

You would also need to get a good read on the prevailing market cap rate of the area. This may entail talking to local commercial brokers, investors, property managers who are keeping track of the pulse of the local market/economy. The 11.6 cap rate is totally irrelevant because 1. it is based on NOI that is usually inaccurate (i.e. understated expenses). 2. once you get a good NOI, you should use the prevailing market cap rate to calculate estimated value of the property.

Cheers... Immanuel