BRRRR on a building looks like BRRRR on a house: buy it cheap, fix it, rent it, refinance, do it again. The fourth step is where the two part company, and the dividing line falls between four units and five.
Below that line a lender looks at the appraisal. Above it, the lender looks at the appraisal and the income, and lends against whichever is smaller.
What changes when a BRRRR is a building?
Three things, all of them at the refinance.
A house is valued on what similar houses sold for. A building of five units or more is valued on what it earns, so the rent roll you create during the rehab is the thing that creates the value. That cuts both ways: lift the rents and you lift the appraisal, but weak rents cap the appraisal no matter how good the kitchens look.
The second change is the income test. On a building, the lender sizes the loan on what the rent covers, then checks that against its loan-to-value limit and writes the smaller number. DealLevel’s calculators treat five units as the threshold, and the BRRRR calculator says so on screen once you set the unit count that high: at that size lenders size the loan on the building’s income, and the loan comes due in five to ten years.
The third is that last clause. A commercial loan is usually paid off over 25 or 30 years but matures long before that, so a balance falls due on a date you can circle now.
Two to four units: the appraisal decides
A two-to-four-unit building is still residential financing, which means the appraisal does the work. Freddie Mac caps a cash-out refinance of a 2-to-4-unit investment property at 70% of its value, for the loans it buys, against 75% on a one-unit rental.
Here is a fourplex bought for $360,000 with $72,000 of work, 2% closing costs, and six months of holding costs at $2,600 a month while the units are turned. It appraises at $520,000 afterwards and the four units rent for $1,400 each, $5,600 a month. Allow 6% for empty weeks, 5% of rent for repairs, 5% for replacements, 8% for management, $6,000 of yearly taxes, $4,200 of insurance and $400 a month of common-area utilities. The refinance is 70% at 7.5% over 30 years.
That refinance is $364,000, the full 70%, and no income test trims it. Worth noticing: the building’s income only covers that payment 1.18 times. A lender applying a 1.25 minimum would have stopped at $343,929, about $20,000 less. On four units nobody asked.
Five units and up: the income decides too
Now the same idea one unit larger. A six-unit building bought for $540,000 with $110,000 of work, 2% closing costs and eight months of holding at $3,400 a month. It appraises at $800,000, and the six units rent for $1,350 each, $8,100 a month, with $9,000 of taxes, $6,000 of insurance and $600 a month of utilities. Same 6% for empty weeks, same reserves and management, same 7.5% over 30 years.
Seventy percent of $800,000 is $560,000. But the building earns $51,672 a year after running costs, and a 1.25 minimum allows payments of $41,338 a year, which is $3,445 a month. At 7.5% over 30 years that payment supports $492,667, so that is the loan. The calculator shows the difference on its own line, held back by the lender’s coverage rule: $67,333.
| Fourplex | Six-unit | |
|---|---|---|
| Appraisal after the work | $520,000 | $800,000 |
| 70% of the appraisal | $364,000 | $560,000 |
| Income after running costs, a year | $36,072 | $51,672 |
| Loan that income covers at 1.25 | $343,929 | $492,667 |
| Loan the lender writes | $364,000 | $492,667 |
| Coverage on the loan written | 1.18 | 1.25 |
These are example figures, not a forecast for any market.
What stays in the deal?
The loan is what hands your cash back, so a smaller loan means more of your money stays in the building and is not available for the next one. That is the whole engine of the BRRRR method slowing down.
| Fourplex | Six-unit | |
|---|---|---|
| Purchase price | $360,000 | $540,000 |
| Closing costs (2%) | $7,200 | $10,800 |
| Rehab | $72,000 | $110,000 |
| Holding costs during the work | $15,600 | $27,200 |
| Closing costs on the new loan (2%) | $7,280 | $9,853 |
| Paid back by the new loan | −$364,000 | −$492,667 |
| Cash still in the deal | $98,080 | $205,186 |
Had the six-unit refinanced at the full $560,000, $139,200 would have stayed in rather than $205,186. The coverage rule costs this deal $65,986 of cash back.
It is not all cost, which is the honest part of the story. The smaller loan means a smaller payment, so the six-unit clears $861 a month against $390 on the uncapped version, and its coverage sits at 1.25 instead of 1.10. The lender’s rule traps your cash and protects your monthly at the same time. Compare that with the fourplex, where the full 70% went through at 1.18 coverage and $461 a month: nothing stopped you borrowing past the point a commercial lender would allow.
A one-house BRRRR where the rent test trims the loan runs the same mechanic at 8% on a single rental, and a six-unit purchase where the income test asks for $35,006 more shows it on the buying side rather than the refinance.
What comes due in five years?
The six-unit’s loan matures in year five with $466,149 still owed. On that date you refinance it, sell, or pay it off, at whatever rates exist that year.
That is a real risk and a plannable one. You know the date and roughly the balance from the day you sign, so the question is what rent the building needs by then to support a new loan of that size. A building whose rents you raised during the rehab has somewhere to go. One already at the top of its market does not.
What should you check before buying a building to BRRRR?
Ask the lender first, not last.
- What is your minimum coverage ratio, and at what rate will you size the refinance? Those two numbers set your loan, and therefore your cash back.
- When does the note mature, and what are the terms for extending it?
- Will you size it on the rents in place or the rents after the work? This decides whether the rehab counts at all.
- What does the appraiser use as the market cap rate? On five units and up, that single assumption sets the value.
Then run both versions in the calculator before you offer: the building at the loan-to-value limit, and at what the income covers. If those two numbers are far apart, the gap is cash you will not get back, and it is better to find that out now than in the fourth step.