Question about BRRRR - Don't you go DEEP into debt with this?

Question

Hi, this is something I figure will get answered the more I study (reading Greene's BRRRR book now), but thought I'd take the shortcut with you good people.

I feel like BRRRR is pulling a fast one.  Third R is refinance, so you get your cash out to reinvest.  Doesn't this just load you up with a mortgage loans?  In other words, since you keep the property you just bought, rehabbed, and rented, the money you "get back out" is really just a loan, right?

So, if you go nuts and BRRRR like 100 properties, doesn't that equal a ton of debt servicing?  How are you making money, if that money's really just loaned to you?

Thank you for taking the time to answer this remedial question!

Dominic Rosato · Answer

I think your question is related to mortgage loans in general, rather than just BRRRR. You will almost always be taking on large amounts of debt when you invest in real estate, but that doesn't mean it's BAD debt. This debt allows you to own an appreciating asset and collect rent on it, with a relatively low interest rate. As you probably know, the goal is to have that rent offset your loan payments (cash flow).

Using your example: Fast forward 30 years when all of your debt is paid off and you own 100 homes that are straight cash flow. Will you be happy you used the BRRRR method?

Using your example: Fast forward 30 years when all of your debt is paid off and you own 100 homes that are straight cash flow. Will you be happy you used the BRRRR method?

Alecia Loveless · Answer

@Peter Martinson I’ll play the devil’s advocate and suggest you only leverage as much as you’re comfortable with.

I also make sure that personally I leave some equity in my deals so that it’s a little easier to make more cash flow.

I try to keep at least 20% equity in my deals, that’s my comfort zone and I try to build up a decent amount of reserves in case something goes wrong and I need to cover the mortgage payment without rent for a few months.

But I have used the BRRRR method to refinance and pay for other investments and it does work.

Rick Albert · Answer

I agree with Dominic. Most investors take out mortgages. With the BRRRR strategy, you are just getting the loan in a different way.

As a matter of fact, you are reducing the risk with BRRRR because in theory with the renovations your capital expenditures would be lower. For example I did a BRRRR and put in new AC units. Now it should be good for 15+ years. The debt is covered by the tenants, and I'm building wealth through appreciation, loan buy down, etc.

Based on what you are saying, you should be paying cash for any and all properties going forward. It's not a bad strategy, but you will move much slower.

Carlos Ptriawan · Answer

One beautiful thing about why we do refinance rather than outright selling is that we can capture future appreciation by selling it later ; second, it reduces the tax implication as well. Having mortgage leverage is okay because the risk is understood from the beginning and when we will sell it.

Justin Hammerle · Answer

@Peter Martinson - cashflow, price appreciation, equity buildup, and harvesting.

Corby Goade · Answer

Sure, but YOU aren't paying the mortgages, your tenants are. And the value is growing over time and rents are rising, etc. Before you know it, you'll have all kinds of equity and in many cases with BRRRR, you have $0 of your own in the deal. It's seriously the best.

Rick Albert · Answer

Correct. It lowers your capital expenditures. A home inspection can only see so much when you buy a property. Especially when it has been vacant for a while.

Peter Martinson · Answer

Thank you for this response @Corby Goade.

Nicholas L. · Answer

@Peter Martinson

...and a lot of us are (or were) refinancing into DSCR loans rather than conventional loans, so your personal DTI ratio is not a limiting factor.  but, the rates on DSCR loans have made it much, much tougher to cash flow.  BRRRR is still a great strategy, as you can force equity - but you're much more likely to break even once you're done.

i have a mix of conventional and DSCR mortgages on my rentals..  all of them are fixed rate.

Abbey Humphreys · Answer

The people here said it well- this sort of debt is not a life sentence and it is also a way to build long-term wealth. It can certainly feel intimidated to take on more and more debt, but the key is to break out of that headspace and recognize that your properties will pay for themselves (while the returns go in your pocket) and you will eventually flat-out own all of these appreciating assets.

Question about BRRRR - Don't you go DEEP into debt with this?

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