I'm having a hard time understanding how the BRRRR method is beneficial. I understand how it can be used to buy a lot of property but confused on how this method actually makes you money.
As I understand it the BRRR method works like this (closing costs, fees, and down payment are left out to simplify the math). So let's say I want to buy a home for 50k. The home needs 15k worth of rehab. So I get a loan for a total of 65k. I put 15k worth of rehab into it and the property is now worth 100k. I then cash out refinance it for its remodeled value and get the full 80k (bank will only loan up to 80% of value). I pay the original loan off and now have 15k. I then take this 15k and do the process all over again with a new property.
How does one make actual money doing this? I understand that I now essentially have $15k but I also have a larger mortgage. Isn't this basically the same as going out and getting a personal loan for $15k? It's not actual $15k profit unless I were to sell the house, correct? On top of this I'm now getting a smaller cut from my renters because of the new mortgage. So not only do I have a larger mortgage I now have less monthly cash flow as a result. What am I missing here?
Full disclosure. My husband and I do not follow the BRRRR plan. We have our own thing that works with us.
The point is to get a positive cashflow going. Yes, you will end up with a lot of debt, but after subtracting out the payments that you have, you should have a little extra for yourself as net income. If you rinse and repeat, this net income will hopefully be enough to substantially subsidize your full time job income. Some people have gone as far as having this amount being enough to replace their full time job, given that they have enough rental properties that have positive cash flow.
Hope that helps.
Ok, let me try to be more clear.
After your last step there, you now have $15k and some positive cash flow (net income). You can get another loan to stack on top of your $15k and go out get another property. Rehab. Rent. Refinance. Assuming everyone went well, now you have $30K and slightly more net income. Repeat. etc. The point is to build up that profile of rental properties to bring in positive cash flow. Each rental property may not bring in much, but a whole bunch of them together will bring in enough on a monthly basis to subsidize your lifestyle.
Also, here is another thing to consider. I don't think seminars and online articles stress this point enough. You need to think of everything in terms of assets and liabilities. I know most people think your personal home is an asset, but it is actually a liability. Banks always tell you something like a boat is an asset, but as a matter of fact for most people it is a liability.
Once you understand what are assets and what are liabilities and able to identify things in your life based on these 2 categories, then you will understand that a rental property that has a positive cashflow is an asset and that this is the whole point of your venture into REI.
For example, my husband and I own outright 5 properties. We are closing a 6th next week and are working on obtaining a 7th. The 5 rental properties we have right now all have tenants and they are worth a lot more than what we paid for them. In other words, they are assets. Until our 6th and 7th get tenants, they are liabilities because so far they only cost money without making any.
The BRRRR method is probably the safest method to building real assets.
@James Ashley yes that is what you do. You need to make sure that it has a good rental cashflow on it and then hopefully get around $200-$300 a month. I think it is better then selling because by the time you take your closing fees, realtor fee and all the other fees you have, you loose quite a bit of money from the sale and holding it.
Doing this you now have a cashflowing property and $15K of profit in your hand. You can refinance the property again in 5 years if you want, have your renters pay off the mortgage or sell it down the road if the appreciation goes way up.
It all depends on your end goal. You NEED to know what your end goal is.My end goal is to build a passive cash flow. You can't do that without rentals, so that's what I am doing.
I've done a ton of these
you buy the house for 50k you put 25k into it. you're all in for 75k
ARV is 100k, fannie mae will let you pull out 75k, so you get back all your cash
first, just just made 25 GRAND IN EQUITY. Figured that would be enough
second, you have cash flow, ~250 bucks a month if you buy right
you get the tax benefits of mortgage interest deduction and depreciation
and you have 100% of your funds back in your pocket.
this process doesn't scale well, but it's incredible lucrative and efficient.
also, the details matter here so those numbers are subject to vary, this example is pretty much exactly what I do though.
I know I started this thread a long time ago but I want to revisit it. I’m still having a hard time understanding how people make this work. Using the numbers above to continue the example. I buy a $50k home and arv is 100k. So I put 25k in rehab and refi at 75k. This home now has a mortgage of ~$500. Rent in my area for a home I could get at this price is $750-800. So subtract the $500 mortgage and I’m only left with $250-300. That puts me outside the 50/50 rule. Is it just because my market is so low?