Does the BRRRR method still work with commercial properties?

Question

Does the BRRRR method still work with commercial properties such as apartment buildings, and other large multifamily properties?  Why or why not?  Do you need to pay all cash for a deal in order for the BRRRR strategy to be successful?  Why or why not?

Christian Ehlers · Answer

BRRRR can work with any asset class as far as I understand, it works especially well in commercial properties though! This is because commercial properties are valued based on the income they bring in and the typical cap rate for the area. By improving the property through Rehab and/or improved management (Ie increasing rents/income and decreasing expenses) you can very quickly raise the value of a commercial property, and then be able to refinance based on the new Net Operating Income (NOI).

You don't need to pay all cash for a BRRRR deal to be successful, and most large multifamily properties aren't bought with cash anyways, as the amount of capital needed from 1 or a few investors would be huge! Also what do you consider a successful BRRRR? Leaving none of your own money in the deal after the refinance? (Very difficult in today's market). Leaving only 10%, 15%? its all perspective.

Nick Belsky · Answer

@Aaryan Patel

BRRRR is a method that can be applied to just about anything.  It is perhaps, easier to accomplish on certain property types, but overall, it can work on anything.

Cheers!

Mike Dymski · Answer

BRRRR is just a new name for an age old strategy for adding value to a business and accessing that value for the next one.  It can be done on any business.

Kory Reynolds · Answer

It most definitely does - an infinitely scalable concept. A few anecdotes to follow that I have been a part of as my clients tax compliance/consulting resource. In some cases, they were distressed properties that the current owners didn't have the resources to crawl out from under the problems.

I have a few clients that started off BRRR with small multifamily, and have recently scaled up to $5-$10m properties.

I have another client (they have been at it for decades) that just purchased

a distressed asset for about $14m, they are putting $8m into it, and the ARV is somewhere around $30m. They have 3 other properties with similar approaches in process, with purchase prices of $6m-20m, multi year investment to add value, and then an eventual cash out refi which is primarily rolled into new projects.

Significantly longer turn around times on these projects than a standard small BRRR, but the overall concept is the same.

Aaryan Patel · Answer

@Andrew Postell

Can you still get all of your money back after the 4 years?

Andrew Postell · Answer

@Aaryan Patel so not in the literal sense with how they work with residential properties.  We can implement the BRRRR method in as little as 1-3 months on the residential side (sure it can longer too) but on the commercial side it's about a 4 year process.  The main reason here is that because of how commercial properties are underwritten on value - they analyze the last 2 years of rent rolls - it takes significantly longer to execute.  For example, if you purchased a 200 unit apartment complex that you wanted to work a "value add" on - well, you would need to renovate the 200 units - that will take about 1-1.5 years to complete, then you need 2 years of your increased rent rolls to get that value add - because when you refinance the property the loan will need that 2 years of increased rents.  However, to take down a $3million - $5million (or more) commercial property means you'll need some people to help you finance it.  And the normal method of fundraising capital at that level is by saying that you will pay everyone back in about 4 years.  And that's why most people flip commercial properties like that (and the flip takes about 4 years too).  I'm probably over simplifying it but that's the "concept" of it.  You can certainly follow the commercial forum for more details on it.  In the normal world we are saying BRRRR for residential properties.  Hope all of that makes sense.

Aaryan Patel · Answer

I would consider leaving 10 percent to none left in the deal as successful. Do you think that’s achievable??

Does the BRRRR method still work with commercial properties?

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