BRRRR'ing a Duplex/Triplex/Fourplex

[Isaac Fridmann]

Hey BP!

I apologize in advance since I'm sure this question was asked before but I can't seem to find any clarity. I'm trying extremely hard to acquire my first duplex. It is more than a dream of mine (cheesy, I know). My intention is to BRRRR the property so I can start building a portfolio. I've been hitting a roadblock when trying to analyze the deal. I will outline it below:

1) When trying to determine the ARV, what do you do if there are no duplexes nearby that sold?

2) Continuing from the first question, when trying to analyze what the rent will be after rehab, what do you do if there are no renovated comps?

3) If the goal is to BRRRR, do you need to take the current properties rents into account when analyzing?

I've watched a lot of Bigger Pockets videos on analyzing a BRRRR but the ones I've found haven't really explained how to come up with the ARV for the BRRRR. If you know of any other resources, I'd be extremely grateful.

I would really appreciate any feedback and am even open to paying if someone wants to jump on a zoom and do a live analysis of a property in my marketplace (I hope that doesn't violate any rules on this forum).  

Thank you again! 

[Josh Edwards]

Hey Isaac!

I would be happy to jump on a zoom call and see what I can help you with, no charge! Investors have to stay together, and analyzing a deal correctly is one of the most important parts of investing

1) I would expand the radius and timeline (12 months instead of 6 months) of the comps your pulling until you have at least 3-5. Generally multi-family properties get lumped together via city zoning, so there should be some properties similar nearby that have sold. If you send me the address I can see what I can pull up for you as well.

2) Generally most lenders will get a rent appraisal done and unless you rehab the property into a luxury property, add bedrooms, etc. the rent appraisal likely won't be a ton different than the current rents are on the property.

3) Yes, always take the current property rents into account. The ARV is going to help you get your get your money out for the "refinance" part of the BRRR part of the strategy, but your rents might not go up at the same rate after the rehab so you want to make sure your at least close to cash-flowing off the current market rents.

I sent you a PM as well!

[David M.]

@Isaac Fridmann

Honestly, part of determining the ARV can be more so an "art," usually when there is a dearth of info. Condos can be really easy since they are similar and when there is a history of sales, for example.

If you don't have duplexes around, you have to do your best with other aspects such as sqft and bdrm/bath, for example.  Don't forget other charactistics such as garage, driveway/parking, etc.  Is this just an academic question?

Same with rents..  You can't find a single example of a rented place with similar bedr/bath in an updated condition?

Sorry to be possibly flippant, but I just noticed your profile says you are a Realtor.  While the pre-licensure course teaches only so much about pricing, but you should be able to answer these basic questions on your own, right?  Am I not understanding your questions?

for Brrr, the "rent for the current property" (I assume is what you are asking) could be taken into account...  Is the rent at market value?  I assume the condition of the property is relatively poor otherwise the brrr wouldn't make much sense.  One would think that after renovation the unit should be able to command greater rent.

Basically, coming up with the ARV after brrr is looking at other similar properties in the area that have sold and are in an updated condition. Short of trying to just number crunch, you need to learn your market.

[Isaac Fridmann]

Quote from @Josh Edwards:

Hey Isaac!

I would be happy to jump on a zoom call and see what I can help you with, no charge! Investors have to stay together, and analyzing a deal correctly is one of the most important parts of investing

1) I would expand the radius and timeline (12 months instead of 6 months) of the comps your pulling until you have at least 3-5. Generally multi-family properties get lumped together via city zoning, so there should be some properties similar nearby that have sold. If you send me the address I can see what I can pull up for you as well.

2) Generally most lenders will get a rent appraisal done and unless you rehab the property into a luxury property, add bedrooms, etc. the rent appraisal likely won't be a ton different than the current rents are on the property.

3) Yes, always take the current property rents into account. The ARV is going to help you get your get your money out for the "refinance" part of the BRRR part of the strategy, but your rents might not go up at the same rate after the rehab so you want to make sure your at least close to cash-flowing off the current market rents.

I sent you a PM as well!

@Josh Edwards Thanks! I Just replied to your message.

[Andrew Postell]

@Isaac Fridmann I'll try to answer these as you asked them:

1) When trying to determine the ARV, what do you do if there are no duplexes nearby that sold? - There is some nuance to what you are asking so I'll try to answer this question with another scenario.  Let's say you wanted to buy a beach front property.  The trouble with beach front property is that nobody sells their beach front property.  So when I am purchasing "beach front", how do I comp it?  And the answer is that you have to rely on NON-beachfront property to comp a beachfront property.  And that means, the appraiser has to guess at the value of the view.  You are essentially giving up control of your deal to someone's opinion.  Which is why when we purchase beachfront or lakefront or any other "unique" or special type of home the expectation should be that the appraisal might be different than your purchase price and be prepared to bring extra money to closing.

So how does that translate to a duplex?  Well, I would guess that you could get some duplexes if you expanded your search to 3 miles...or 5 miles?  And then those duplexes are in different neighborhoods.  And that means we are giving up control of our deal to someone's opinion again.

Now, if there are truly NO duplexes anywhere around - then that means certainly loan types will not lend.  Some loans MUST have comparable properties but some don't need that.  Usually the ones that don't need comps have a higher rate though...or some other feature that's not as desirable to it. 

Now, this is why most of us stick to the "boring" properties when using the BRRRR method. Boring = safe. Safe = less risk. I mean, the BRRRR method is risky enough as it is - so we try not to complicate it. Should you still execute on this property? It will probably work out but just know there might be some differences on the appraisal value. One of the skillsets you will need to get good at here is estimating the ARV on a property. Right now, and experienced real estate agent can help you with showing you value. But eventually you'll need to be able to do this on your own. It takes time and practice for sure but you can get there.

2) Continuing from the first question, when trying to analyze what the rent will be after rehab, what do you do if there are no renovated comps? - yeah, I would guess that we just need to expand the search...but if there are truly NO renovated comps then that tells me that I should not OVER IMPROVE the property. If I over improve a property - then I'm not getting my value back out of the property. If I install granite countertops...and the neighborhood is not a neighborhood that has granite countertops - then I'm losing money on that rehab. Same with enclosing the garage, or installing energy efficient windows, or hardwood floors, etc. You don't want the best home in the neighborhood - you want the average home. That's how we target a successful BRRRR property.

3) If the goal is to BRRRR, do you need to take the current properties rents into account when analyzing? - Sort of...but I do it in a slightly different way.  So if I look at cashflow for the next 12 months....it's not going to be very good.  By the time I enter all the costs, expenses, etc. against the higher amount I have to pay, higher rehab costs, and higher interest rate....I'm not really cashflowing this year.  But next year, when I increase rents, I'll be better.  And the year after when I increase rents...and the year after, and so forth.  So I look at it with a 5 year analysis.  That's what all the old school people taught and that's what I still follow to this day.  You can read this post on what Brandon Turner wrote HERE.  We make money 3 ways with real estate - so if one doesn't pan out for a year, then you still have the other two ways.  And it's always a long term view.

Hope all of that makes sense!  Thanks!

[Brad S.]

Ok, the answer to #1 & #2 are:
As a 25+yr appraiser, if I have no nearby recent duplex sales or no renovated comps to comp out my Subject, I raise my assignment fee!

Ok, not the answer you were looking for, I assume, so here are other answers:

So, a good and experienced appraiser should have multiple techniques to approach this situation, which may help in evaluating a potential property.
* I would go back in time (sometimes years) to find any duplex sales, apply adjustments for any differences (size, condition, quality, etc), and then determine and apply any appropriate market trend adjustments (run a market trend analysis to see if there was an appreciating/depreciating values in the area of the comp/s, using linear regression or sale price/sf, etc). Obviously, this is somewhat technical and ways I need to approach it as an appraiser, but you could find a general source for market trends somewhere and/or apply an educated guess. Example: A duplex sold for $100k 2 years ago in your subject area and you find some general sources which state the local market has increased 15% in the past 2 years. Then you simply apply a 15% market trend adjustment to that sale, estimating it's current value around $115k.

* I would also look far and wide to adjacent neighborhoods to find any recent duplex sales and then assess and apply appropriate location adjustments. Example: you might find a duplex sale in an adjacent neighborhood which you determine sells for approximately 10% premium (higher appeal nhbd) than the Subject neighborhood, so you would assume a $100k duplex sale there would be worth about $90k in the Subject neighborhood.

* I would look for 3-4 unit sales in the Subject neighborhood and try to determine an adjustment per unit. Example: I might estimate a triplex sells for $50k more than a duplex, and therefore, generally assess a $50k value for that 3rd unit. Then if I have a triplex which sold for $150k, my duplex may be around $100k. This technique is not usually too accurate, in my experience, but can sometimes give you an idea, in areas lacking recent data.

* You can also use the income approach, although, it is not very reliable in 2-4 unit properties. But, you could determine a general GRM (gross rent multiplier- sale price/monthly gross rents) for the neighborhood (preferable similar type properties-duplexes vs duplexes, etc) and apply that to each unit's rents or potential rents. Example: estimated GRM of 100 x estimated monthly rents of $2,000 for both units, gives you a $200k value. This technique is also not usually too accurate, since grm's can fluctuate based on multiple factors. You can also apply this per unit. Example: You apply the grm of 100 to a $1,000/mth rent for a 2 bed unit, to estimate that unit has a value of $100k. Then if you find a recent triplex sale with a 2 bed 3rd unit (an additional 2 bed unit than the Subject), you can subtract $100k, to give you an idea of the duplex value.

* And for quality and condition, I would look for other sales, preferably 2-4 units, and try and find pairs with differing condition, to analyze market appeal. Example: You may find 2 recent triplex sales, one remodeled and the other not and analyze any sale price difference. I like to use % differences for this, like maybe a remodeled property sells for an estimated 5% more, etc.

Basically, you are looking for sales as similar as possible to your Subject, and attempting to "balance" or normalize them to your Subject, by adjusting for differences (remodeled vs original condition, duplex vs triplex, recent sale vs older sale, average neighborhood vs higher appeal nhbd, etc).  

Also, you mentioned determining rents for rehabbed units. You can use the same techniques for that, by widening your search for any rehabbed unit in any area and then try and adjust for differences. Example, you may find a rehabbed 2 bed unit in a quadraplex that rented for $1,100/mth and another 2 bed unit, not renovated, in a triplex rented for $1,000. That suggests a $100 difference for the rehabbed unit or 10% difference. Of course, that difference could be due to other characteristics also. And again, you can go back in time, to other neighborhoods, etc.

Yes, I know, it is not straight forward at all and can become more of an art. But, this type of situation may create more opportunity for an investor, since it is not as cookie cutter as many investors would like and they may not be able to recognize the nuances or opportunity with some deals.