Modeled the same fourplex both ways. The plain hold won on IRR.

I've been trying to work out what my first deal actually costs and ended up modeling one property both ways to see whether the rehab-and-refi cycle was worth the extra work. Numbers are from a real listing I underwrote and did not buy, so treat them as a model rather than a result.

Stabilized version: 1980s fourplex, 440k asking, in place blended rent 1,190 across four, minimal deferred maintenance. 25% down at 110k, DSCR debt on the balance. Year one cash flow modeled at 11,400 after a 10% capex reserve and 8% management. No rehab, no vacancy, no carry.

BRRRR version: same building, negotiated to 395k on the theory that I'd take on 85k of deferred work and push blended rent to 1,520. My cash in at 118k with the bridge structure. Fifteen months to refi. Modeled refi at 65% of a 585k value, returning 74k, leaving 44k in. Year two cash flow 14,900 on the higher rents and higher debt.

On a five year hold the BRRRR version wins on cash-on-cash after refi, obviously, because the denominator shrinks. On IRR over five years the stabilized version came out ahead by about 180 basis points in my model, because fifteen months of bridge interest, two rounds of closing costs, and the vacancy during turns all land in year one where they hurt the discount most. The BRRRR only pulled ahead when I extended to eight years or assumed I redeployed the 74k into another deal immediately.

Which is the actual argument for BRRRR and I had been fuzzy on it. The strategy isn't a better single deal. It's a better sequence of deals, and only if the recycled capital actually goes back to work fast. If it sits, you paid for velocity you didn't use.

What I'd keep from the exercise: modeling the refi proceeds as a separate line with its own reinvestment assumption instead of folding it into deal returns.

4 replies

3priya_n21PO1C

This is the clearest statement of why I've been uneasy about BRRRR without being able to say why. If the 74k sits in an account for eleven months while I look for the next thing, I've done a rehab for nothing.

1dpatel_reCS4A

Your reinvestment assumption is where the whole comparison lives, so I'd push on how you set it. At what redeployment lag does the BRRRR version stop winning at eight years? If it's four months you've built a model that requires you to be a full time acquisitions shop. If it's twelve months the strategy has real slack in it.

Also the 585k refi value against a 395k purchase plus 85k rehab is a 105k spread on 480k all-in. That's the assumption carrying the most weight and it's the one an appraiser gets to decide. What happens to the eight year crossover if the appraisal is 540?

2chriswalton8CC1CPRO8

@sextant's second question is the one I'd want answered before anything else. Learning how private money looks at these, the people I've talked to underwrite the appraisal at a haircut to the pro forma value as a matter of habit, because the spread between all-in cost and appraised value is the only source of the cash back.

0angela_burkeServicePRO6

One thing missing from the stabilized side. A building with minimal deferred maintenance at 440k in 1980s stock still has a roof and a water heater with a date on them. Your 10% reserve covers the average year, not the year the roof goes. The BRRRR version buys you a known condition, which is worth something the IRR doesn't capture.

Modeled the same fourplex both ways. The plain hold won on IRR.

4 replies