As real estate investors consider the transition from residential to commercial investing, they often decide not to make the jump due to the significant differences between the two. However, while differences exist, overlap between residential and commercial real estate also exists.

And, the BRRRR method represents one shared investing strategy between these two types of real estate, with the commercial BRRRR largely analogous to its residential counterpart.

In this article, I’ll dive into how the commercial BRRRR works, providing an overview of this outstanding investing strategy. Specifically, I’ll cover the following:

● Commercial BRRRR Overview

● Step 1: Buy

● Step 2: Rehab

● Step 3: Rent

● Step 4: Refinance

● Step 5: Repeat

Commercial BRRRR Overview

Like its residential counterpart, commercial BRRRR provides investors a means to establish a replicable strategy to grow a property portfolio.

Specifically, investors analyze a prospective deal to accomplish the following: find and purchase an undervalued property, add value to it, rent the property to high-quality tenants, refinance the stabilized property, and use those refinance proceeds to repeat the process.

I’ll talk a little more about each of these steps in the below sections.

Step 1: Buy

The first step to the commercial BRRRR is buying an undervalued property. As with the residential strategy, this below-market purchase price proves critical to a successful commercial BRRRR.

Buying an undervalued property allows investors to structure a deal so that, even after the costs of the rehab process, they can add market value prior to the final appraisal and subsequent cash-out refinance.

And, while a commercial property may be undervalued for a variety of reasons, it’s likely due to maintenance and renovation requirements, which leads into the next step of the process.

Local commercial real estate professionals can help you identify the ideal BRRRR property for your market and unique situation - need help finding reliable ones in your area? Drop us a note!

Step 2: Rehab

As the name makes obvious, the next step to the commercial BRRRR strategy is rehabbing the undervalued property. The added-value goals here are two-fold, as investors want to:

● Ensure the property appeals to potential tenants; and

● Increase the market value to increase refinance proceeds

However, prior to actually purchasing the property, investors need to confirm a deal’s rehab budget. A failure to accurately project these costs can undercut the profitability - and feasibility - of an entire deal.

Consequently, as part of a deal’s due diligence process, investors should walk the property with general contractors to develop an accurate rehab budget.

A solid team is absolutely critical to a commercial rehab - need help putting one together? Drop us a note!

Step 3: Rent

As with residential real estate, lenders will not consider refinancing a property until it’s actually stabilized, that is, fully leased. And, that’s why it’s absolutely critical to work with an outstanding team of commercial real estate professionals to get your property leased.

The longer your property remains unoccupied, the more holding costs you need to cover, and the longer you need to wait to refinance (and move on to your next deal).

When you work with solid brokers and property managers, these team members can focus on marketing and leasing the property during the rehab process - rather than waiting for the property to be fully renovated.

And, as part of the deal’s original analysis, investors can factor market-leading after-rehab rents into the budget, further improving the appeal to tenants and, by extension, speed at which the property will lease.

Step 4: Refinance

The refinance step truly differentiates the commercial BRRRR strategy from the residential one. Whereas residential appraisals are based on market comps, commercial properties appraise based upon NOI-driven cap rates, providing commercial landlords far more control over valuations.

When you have a high-quality tenant and greater NOI, lenders typically assess a lower cap rate on a property, which leads directly to a greater valuation.

As such, investors should refinance these properties as soon as they’re stabilized. And, while different standards exist for every lender, this typically means between 85 to 90% occupancy.

During a refinance, BRRRR investors need to pull out a minimum of 100% of the cash they put into the deal in order to allow for strategy replication. But, a well-structured commercial BRRRR will allow investors to pull out more than their initial contributed capital while still retaining ownership - an outstanding outcome.

Feel free to drop us a note if you need help running the numbers on a commercial BRRRR deal. The analysis can seem challenging the first few times, and we’re happy to help!

Step 5: Repeat

To recap, here’s where you stand at this point in the BRRRR strategy. You now have:

● Ownership in renovated commercial property

● Tenants fully stabilizing this property

● A permanent financing solution

● Your original capital (and potentially more) in your pocket

So, what’s next?

Repeat the process! This is the ultimate beauty of the commercial BRRRR strategy: you can repeat it as many times as you want, as you finish a deal with the same (or more) cash-in-hand as you started.

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We recognize that, even after outlining the above information, pursuing a commercial BRRRR strategy can seem daunting.

That’s why we’re here to help. The Pocket Broker team lives and breathes commercial real estate, so drop us a note to see how we can help you achieve your unique objectives!

How Does The Commercial BRRRR Work?