BRRRR with tenant occupied property

20 Replies

Looking to implement the BRRRR strategy on my next investment. I am wondering can you do BRRRR with this kind of property that is currently occupied by tenants? Do you evict the current tenants and do the rehab and rent again with a higher rent amount? What if the current rent is already inline with the market rate? The point of doing BRRRR is to bring up the home value, so you can refi to get the money out again and reinvest to another property. Does that mean you will always kick out the current tenant to rehab the property?

Jason.

It depends on the property. If the current tenant is at market rent, then a BRRRR may not be possible.

If the tenant is paying below market rents then you can go in and buy the property. Try to get the tenant out of there as soon as possible. If you cannot then you can wait out their lease. Once their lease is up then renovate the property and bring the property to market value by increasing the rent. Then do your cash out refinance. 

@Antoine Martel

Thanks for the input. So it sounds like if the rent is already at market rate, then the property won’t suit for the BRRRR strategy anymore? What if making some rehab can increase the home value, should I still do it?

Originally posted by @Jason Chen :

Antoine Martel

Thanks for the input. So it sounds like if the rent is already at market rate, then the property won't suit for the BRRRR strategy anymore? What if making some rehab can increase the home value, should I still do it?

 No you shouldn't. Why would you spend money on rehab for the same rent amount? 

What is the cash on cash return of the property at current market rents?

I have to disagree with @Antoine Martel

If rehabbing raises the value of the property and forces immediate appreciation then a property already being at market rent doesn't matter. Assuming this is a residential deal based on comps and not 5+ units it could still work for BRRRR.

It's pretty difficult to properly rehab a property with someone in it. I've done a bathroom before, and outside work, but beyond that it's pretty disruptive to the tenant. Aside from that, most of the time BRRRR is going to work on basket cases, not houses that have pink walls, because you are going to buy it at a distressed price because of the scope of work that needs to be done. The houses I've done it on, just as examples: major basement flooding issues; no heating system; needed full replumb/rewire; gutted to the studs from an ex-hoarder; ETC. I suppose it's possible that a few pure cosmetics will give you enough value add that you can refinance, but my experience is that you are taking a house that's not really habitable, making it habitable, getting a renter, and then refinancing it, proving that it has market value by virtue of looking decent and having renters. There needs to be a decent spread between what you paid & spent rehabbing and what you refinance it at in order for this to work. If you buy a house for $100k, spend $5k to put up some paint and new appliances, and replace a couple of busted doors, you're not likely to refinance this for $140k unless you got it at a super steal for some reason.

Originally posted by @JD Martin :

If you buy a house for $100k, spend $5k to put up some paint and new appliances, and replace a couple of busted doors, you're not likely to refinance this for $140k unless you got it at a super steal for some reason. 

Maybe. We've had a luck of success with buying at $125,000, putting $25,000 in (electrical panel, paint, kitchen remodel, full bath remodel, refinished floors, etc), and financing back out at 80% LTC. We are making about 16% CoC. The SFRs are the low headache way to hold land.

ETA: These are West Coast prices, within commuting distance of Seattle. If we were in the Midwest we might make different choices.

Originally posted by @Seth Borman :
Originally posted by @JD Martin:

If you buy a house for $100k, spend $5k to put up some paint and new appliances, and replace a couple of busted doors, you're not likely to refinance this for $140k unless you got it at a super steal for some reason. 

Maybe. We've had a luck of success with buying at $125,000, putting $25,000 in (electrical panel, paint, kitchen remodel, full bath remodel, refinished floors, etc), and financing back out at 80% LTC. We are making about 16% CoC. The SFRs are the low headache way to hold land.

ETA: These are West Coast prices, within commuting distance of Seattle. If we were in the Midwest we might make different choices.

 That's a pretty good remodel, though. New kitchens, baths, floors and wiring does add real value to a house. I didn't mean to suggest that all BRRRRs had to be basket cases, just that a lot of people mistake what they think is going to be value-add from what an appraiser is going to think is value-add. Also, it has to be reasonable against the comps. If comps where you are were $130k, then only crooked or incompetent appraisers are going to get you in at 150. 

@Antoine Martel , I was thinking along the line as @Brian Garrett , but its great to hear different opinions. I was thinking if I know based on the comps I can rehab to increase the home value I would still get the current tenant out and do the rehab. My reasoning is that without the rehab I won't be able to do the refinance to take the money out and repeat the strategy even though the rent is currently on market rate. 

Brian, you mentioned assuming this is a residential but not 5+ units. What other things should be considered for 5+ units to make strategy this still work?

@Alex Corrion , assuming the CoCROI is 10%. Will your decision changes based on this and how?

Maybe, if you are getting 30% CoC then maybe you are willing to do a rehab to get better tenants even tho your rent may not increase. Most likely that is a bad deal. Throw it out and move on to the next one. You can also start to play with the purchase price to see where it would work as a good return (i.e. Purchase for 50k less?). But for 10% put your money in the stock market.

@JD Martin

Completely agree with you on It's difficult to properly rehab a property with someone in it. That's the reason why I think if I need to do the rehab I would have to take out the current tenant. Its easier if the current tenant is paying below market rate, and if the property is vacant. My dilemma was having tenants that already paying at market rate, and that is the case for lots of properties I found right now.  

@Seth Borman good remodel indeed. Did you do this while there are tenants in it?

Originally posted by @Jason Chen :

@JD Martin

Completely agree with you on It's difficult to properly rehab a property with someone in it. That's the reason why I think if I need to do the rehab I would have to take out the current tenant. Its easier if the current tenant is paying below market rate, and if the property is vacant. My dilemma was having tenants that already paying at market rate, and that is the case for lots of properties I found right now.  

 If you have a tenant already paying market rate then there's a reasonably good chance there's not much value to be realized in the property such that you're going to get all of your original cash outlay back. Of course, for good properties there's nothing that says it's a crime to leave some of your own equity behind. If you were working off something worth having and could only recover $90k of $100k outlay, if that $10k equity holdover breaks you then you're probably in too tenuous a position to do this anyway. 

Originally posted by @JD Martin :
Originally posted by @Jason Chen:

@JD Martin

Completely agree with you on It's difficult to properly rehab a property with someone in it. That's the reason why I think if I need to do the rehab I would have to take out the current tenant. Its easier if the current tenant is paying below market rate, and if the property is vacant. My dilemma was having tenants that already paying at market rate, and that is the case for lots of properties I found right now.  

 If you have a tenant already paying market rate then there's a reasonably good chance there's not much value to be realized in the property such that you're going to get all of your original cash outlay back. Of course, for good properties there's nothing that says it's a crime to leave some of your own equity behind. If you were working off something worth having and could only recover $90k of $100k outlay, if that $10k equity holdover breaks you then you're probably in too tenuous a position to do this anyway. 

 This is what I was trying to get at. 

Originally posted by @JD Martin :
Originally posted by @Seth Borman:
Originally posted by @JD Martin:

If you buy a house for $100k, spend $5k to put up some paint and new appliances, and replace a couple of busted doors, you're not likely to refinance this for $140k unless you got it at a super steal for some reason. 

Maybe. We've had a luck of success with buying at $125,000, putting $25,000 in (electrical panel, paint, kitchen remodel, full bath remodel, refinished floors, etc), and financing back out at 80% LTC. We are making about 16% CoC. The SFRs are the low headache way to hold land.

ETA: These are West Coast prices, within commuting distance of Seattle. If we were in the Midwest we might make different choices.

 That's a pretty good remodel, though. New kitchens, baths, floors and wiring does add real value to a house. I didn't mean to suggest that all BRRRRs had to be basket cases, just that a lot of people mistake what they think is going to be value-add from what an appraiser is going to think is value-add. Also, it has to be reasonable against the comps. If comps where you are were $130k, then only crooked or incompetent appraisers are going to get you in at 150. 

The houses will appraise higher than that, closer to $180,000. If we wanted to push we could probably get 80% LTV loans and have no cash in the deal. We have a preferred lender though, for other reasons.

Originally posted by @Jason Chen :

@Seth Borman good remodel indeed. Did you do this while there are tenants in it?

 Never. We typically buy from owners that leave the neighborhood. We have never renovated with a tenant in place, although we have asked people to leave so we could renovate.

Originally posted by @JD Martin :
Originally posted by @Jason Chen:

@JD Martin

Completely agree with you on It's difficult to properly rehab a property with someone in it. That's the reason why I think if I need to do the rehab I would have to take out the current tenant. Its easier if the current tenant is paying below market rate, and if the property is vacant. My dilemma was having tenants that already paying at market rate, and that is the case for lots of properties I found right now.  

 If you have a tenant already paying market rate then there's a reasonably good chance there's not much value to be realized in the property such that you're going to get all of your original cash outlay back. Of course, for good properties there's nothing that says it's a crime to leave some of your own equity behind. If you were working off something worth having and could only recover $90k of $100k outlay, if that $10k equity holdover breaks you then you're probably in too tenuous a position to do this anyway. 

Just looking at the math it seems to me that there are plenty of cases where the rent won't go up but the value will, so you can pay more to free up your own cash through refinancing. That increases your CoC performance because you are getting the same rent with less equity.

Hello All - I have a question regarding property management.

We just recently purchased a triplex and the agreement reads that the PM fee is "(b) A fee equal to TEN percent ( 10 %) of gross rental income received on all rental agreements starting in 2nd month, OR $65.00 per month, whichever is greater."

We got the payment today and realized the property manager charged us 65*3 Units versus 10% of gross rent. What is the industry standard. I read this agreement as the PM will be taking take 10% of the gross rent and not 65*3 units since 10% of our gross rent is greater than $65. . Did I interprete this wrong or PM is playing a smart one on me?

Thanks in advance for your input.

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