BRRR Strategy

22 Replies

I was just reading a post by someone and he mentioned the BRRR strategy.

I like this approach but have a question on the refinance part of it.

I am still a beginner and the idea i have so far is to buy a rent ready property with 20% down and 80% mortgage from bank for 15 years (if numbers work out) else 20 or 30 years loan.

All the while i was thinking that keeping the loan for shorter duration will help as the once the property is paid in 15 years, cash flow will increase (no mortgage), and like wise you can plan to pay off all your properties 10, 20, 30 or whatever number. As you still have to pay 20% down it can't be near 100 i guess.

Some people advocate refinancing to take money out of the property. I want to understand this.

If you refinance a house which was initially having a 15 year mortgage and then take out your down payment and pay down the first loan, wouldn't you get into another loan for 30 years before the property becomes fully free. I am not able to clearly understand the benefit here.

My thought was to have as many free and clear properties as possible, so that if market were to go down , the properties don't go into foreclosures.

SO I am missing the benefit of refinance here, should we not try to pay off the debt as early as possible.

Please give your inputs.

The general consensus is to go for 30 years, not 15. Sure, you will save money over the life of the loan as you will pay less in interest. BUT... when you go 30 years you are hedging against inflation. If the tenants are paying the mortgage payment anyways you will actually benefit from getting a 30 year term loan.

Also if you get a 30 year loan you can technically pay as much extra on top as you want and can just pay it off in 15 if you so choose. But if you run into a money crunch you have the option of paying the lesser monthly payment that comes with a 30 year term. If you get a 15 year term loan you do not have this option; you are stuck paying the higher monthly payment.

you take the 30 year like @Jeff Brower said because it gives you flexibility. You can make extra payments, to equal a 15 year but you don't have to, AND many15 year notes will eat up cash flow.

also, while you do pay more interest on a 30 year note, remember that you're not really taking on that burden. The tenant is paying it, and you're writing it off.

Well, you're associating the BRRR method with low risk, but those two things are mutually exclusive.

the BRRR method works great because refinancing a property with no lien is easy. The result is a cashflowing property and all your cash back in hand.

Paying off the loans in full is a whole other game, and for many people, not a goal. If you want to pay down properties in full, it takes much longer. If you can take some risk, you buy up properties using BRRR to maximize leverage.

Also while doing BRRR try to get properties that have built in equity. So you buy a house, finance 50k but it's worth 90k. Now you have the equity and safety you want while still financing 100% of your costs.

Disagree with Alexander Felice comment. A 30 year note is affecting you even though the tenants are paying it. You have the loan around your neck for 15 more years. That extra interest could be in your pocket instead. Of course cash flow, flexibility, etc may warrant the 30yr note selection but to just say choose 30yr note because the tenant is paying is poor advice in my opinion.

I agree with Alexander Felice, the 1% difference in rate is pretty negligible, and having the option of paying it off early, or taking the greater cash flow is great.  Plus when you account for true inflation, and the current low rate environment, it's an inflation play as well.

From being in the mortgage business for 15 years I'd always recommend a 15 year if you're in a buy and hold strategy. Yes you can pay extra but most borrowers never do. The 15 year requires discipline and you're building equity so much faster. This builds your net worth and also allows you to trade up in properties and you can use a 1031 exchange if your goal is to increase cash flow.

The main problem with 15 yr mortgages is the higher payments, which tends to make fewer deals workable in terms of cash flow.  However, I see you are in Milwaukee and I think I've seen some discussions about properties often meeting the 2% rule there in some submarkets (rent is ~2% of price) and are not class D, which is NOT the case in many places.  15% might work fine there, so if local investors you know are doing it, you can too. Check out posts and podcasts where Brie Schmidt is involved. She invests in Milwaukee I think (and kicks butt at it).

As mentioned in a post above, buying properties at a discount is key so your "equity capture" (the difference between your all in cost including purchase, repairs, and financing vs. the appraisal value after repairs) essentially covers your down payment (or at least as big a chunk of it as possible), which allows you to keep more cash for future acquisitions. 

Another reason for not paying off properties (regardless of loan term) is that equity accumulating in the property is "dead" - it does not earn a return (though it can be a nice hedge against inflation). By refinancing and pulling equity out as cash when your loan balances get low enough for it to make sense, you are able to put that equity to work in additional RE investments at 15, 20, or 30%. Cash flow returns on free and clear SFR properties bought at discount are generally in the range of 10-20% depending on the market, rent/price %, and how much of a discount you buy at, while returns using leverage are 15-30% on the same properties (no precision intended - somebody has the real numbers, but you get the idea).

At some point, the number of houses makes it a pain to manage (even with property management) unless you have great systems in place and people to run them.  And also, there comes a season when you are no longer in acquisition mode and you may decide to pay things down to reduce risk and ramp up free cash flow and be happy with lower returns, but if you focus on paying off properties as you go, you will generally limit your growth significantly.

@Chad Reidlinger I disagree with that point of view (just my opinion). Yes it requires discipline to pay extra but we are not talking about regular retail buyers (which i would assume would be the majority of the clients you would deal with in the mortgage industry) Successful real estate investors tend to be quite disciplined given how much delayed gratification it takes to makes it (note i said successful which is a small percentage of REI)

For investors looking to get conventional loans (prior to graduating to asset based commercial) the 30 year i believe is better not just for the flexibility in payments but for the effect on DTI. I currently work full time and have two loans to my name. My DTI would be greatly affected by the higher payments of a 15 year and limit my ability to buy another buy and hold with a conventional loan. I personally would rather have two 30 year buy and hold properties over one higher payment 15 year.

There are definitely benefits to the 15 year and if you have the very strong cash position and not worried about DTI concerns then its all good. But the flexibility of the 30 years, stronger cash flow, and ability to get more buy and holds is more important to me at this point.

I think there's a HUGE benefit to having that option with a 30 year note vs a 15 year note as several people have already mentioned here, the bank normally doesn't mind one bit if you want to send an extra $100, $500, $5000 or whatever per month along with your normal payment due on that 30 year note, so you can effectively pay it off in 15 years or whatever term you choose and what often makes me shudder when I read some investors or would be investors "plans" is especially in an area like Milwaukee (or any city/metro with a lot of older housing stock) when they're talking about the places with what look to be excellent cash flow #s with an exceptionally low buy in price when compared to real estate in other areas is those properties are almost always going to be OLD housing stock and the part that makes me shudder is how cavalier some of the attitudes are towards unexpected major expenses that may come up over a period of 15 years. 

Now, if you have another source of income and I mean a fairly large source, or are sitting on a large liquid reserve, then an unexpected say, $15k or $20k repair(s) cost might not be much of a hardship, but if you're relying solely on rent income and/or maybe just an average income if you are still working a job, that can fold a big house of cards quickly when you run into an unexpected major repair or multiple repairs. 

When you own and rent out multiple old stock residential properties, you almost have to expect that at some point you're going to get hit hard with maybe multiple major repairs on multiple properties and if it includes some emergency type repairs, like furnaces or boilers failing when we had a winter like two years ago where a few days the high temp was minus 15, crazy stuff starts to happen quickly. 

I had a home I was rehabbing with a less than 10 year old Lennox furnace that decided to quit on one of those minus 15 days and thank God I had a carpenter working there that day who's just an all around smart guy and he knew I had some propane fired heaters sitting in a garage at another house, called me and I got them over there before pipes began to freeze and burst. We'd already partially completed insulating that place too, yet within a matter of hours it was below 32 degrees inside of the house and most of these old homes have NO insulation!

Now, if you've got tenants in there, they're not going to be too happy about it either and will almost certainly call the building inspector if they don't see someone on top of that problem ASAP, so its not the time to start shopping around for a smart fix that will save big money, you may end up simply having to pay for a new furnace or pay the highway robbery type price that the one HVAC guy in town who's even got time to show up charges to fix it.

Times like that are when, if operating on a tight budget, I'd say that extra flexibility of the 30 year note is worth its weight in gold, or else your properties will begin popping up at the sheriff's auction as many already have!

Originally posted by @Karan Nanda :

Thanks Jeff and Alexander for your valuable inputs.

Any thoughts on refinancing?

Had you chosen the right property to buy-rehab-rent, you can repeat the process by refinancing it: The BRRRR model is based on having enough equity in your property (by buying low, adding value or both) so you could use it as a down payment for the long term mortgage, and pull out the loaned funds in order to move on to your next property.

Bottom line, the benefit of refinancing is to "recycle" your initial investment to buy the next property. 

I concur with the 30 year loan unless of course you have huge stack of cash and need to spend. It's IMHO about the time value of money, thus, what you can buy today with same dollar versus what it can buy tomorrow.

I'll parrot some of the responses above that the flexibility of a longer term (30 year) can help out a lot while still knowing that you can pay down the debt more aggressively if you choose.

One point I haven't seen yet is that you may have a different goal in REI than some of the other posters. The biggest question to me is what goals and timeframes are you working with - is your goal to have a certain number of free-and-clear units producing $XXXXX of cash flow when you retire completely in 15-20 years? Or is the goal to build up a real estate empire where recycling your initial investment over and over in the BRRR strategy is more necessary and you reach your cash flow requirements through volume instead?

Either approach, I think 30 year terms while throwing extra dollars against the principal is best, but maybe you hold off on paying down more aggressively until you reach your unit goal.  You can use amortization calculators to figure out how much extra you should pay each month to effectively make it a 15 year instead.

Once your desired # of units are there and you don't need to set aside dollars for more properties (or recycle your initial investments), pay down can get you to the free-and-clear ideal that you are aiming for based on your question.

Tyler...great point!  My goal was to have as many free and clear properties, but after reading about a lot of these posts in BP I'm re-thinking that strategy.

Originally posted by @Assaf Furman :
Originally posted by @Karan Nanda:

Thanks Jeff and Alexander for your valuable inputs.

Any thoughts on refinancing?

Had you chosen the right property to buy-rehab-rent, you can repeat the process by refinancing it: The BRRRR model is based on having enough equity in your property (by buying low, adding value or both) so you could use it as a down payment for the long term mortgage, and pull out the loaned funds in order to move on to your next property.

Bottom line, the benefit of refinancing is to "recycle" your initial investment to buy the next property. 

I think this is an extremely important point to be recognized regardless of which loan terms you choose to do.  If I cannot find the equity in my initial numbers, then I appear to be dead before I have turned a key.

Having said that,  I am a little confused why I would do this with a paid-in-cash property at all.  For example, if I purchase a 40K property, put in 10K and it is now magically worth 100K - why would putting a mortgage on the property make sense?  I understand I would be able to pull out my cash to do it all again, but I am concerned that I am now taking a loan on something I owned free and clear.  Maybe I would have been better off not paying cash in the first place and taking a loan instead leaving me with my cash?  I am very new so maybe this is an innocent perspective...I would certainly welcome hearing more experienced views.

@Account Closed

If you  take a loan in the first place you lock funds into the property (20-25%). The point that makes this strategy work is the higher appraisal of the repaired property which allows you to withdraw those funds and even more, that is, had you chosen the right deal. In the example you gave you can take out $75k (assuming a typical 25% DP) to buy another one of those and pay yourself $25k on the way and let your tenants pay the mortgage.

Furthermore, it depends on your personal goals as others have mentioned in this thread; you can be happy with a handful of free and clear properties, or want to grow a large portfolio for greater cashflow without the need to bring additional funding for each one. 

You had stressed the main point of doing a 15 is getting it paid off and all that extra will be cash flow. If you really break it down, (PITI), you'll hardly see that extra little bit in cash flow making a difference. Let's say you have a $500 mortgage, the property rents for $850, and you do that 4 more times (20-25% down) with the money you would have paid off the first property with. Now, you essentially have (with the same numbers) $1400 extra in cash flow each month. Trust me, I drank the Dave Ramsey kool-aid, and I always thought how you could just snow ball this baby once you get a couple paid off. Truth is, I don't really have the patience for that. RDPD, or The Millionaire Real Estate Investor are both good books that will shed some light on this. I have 4 rentals, all with conventional 3-5% down loans. In 20 years, my payments will still be the same (aside from taxes). Take advantage of the interest rates. I'm no economist, but who's to say the 80's couldn't happen again. In that case, you won't need to even worry about cash flow. Good luck to you. Keep in mind, I'm just one guy. Ultimately, you have to do whatever makes you sleep better at night. I've tossed around ideas and spreadsheets until I'm blue in the face about all the different scenarios. Just keep thinking, and kudos to you for asking questions.

The 30yr loan is better every time, and I'll tell you why: opportunity costs.

Paying down a loan is exactly the same as investing that cash at the loan interest rate.  For instance, if your mortgage rate is 5%, paying down the principal is like earning 5% on your invested cash.  But listen to this - it's actually worse than that, because you're missing out on the tax deductions from the interest.  If you have a 25% tax rate, the loan rate on an after tax basis is actually 5% * (1-0.25) = 3.75%!!!

Now, maybe you like the security of knowing your properties are free and clear.  But why not keep that low rate mortgage in place, and use the cash on hand to invest in another property at a cap rate of 8%, 10%, or even higher?

If you have a good margin of safety in your numbers, and keep cash reserves on hand for a rainy day, then buy more properties and borrow as much as the properties can safely handle.

I have a few units and they are paid for. This position is preferable in my space. Since I am starting out my niche at the moment is buying small units (1bd/1ba) avg 600 sqft, where I shoot for an acquistion cost of 15k per unit, and then fully rehab with an all in cost (including purchase and rehab totaling 50k). Bascically with that said, I have a brand new home worth 75k+. Investing within a smaller footprint really helps keep all cost down, which is something I like, and provides maximum yield.  

On the flipside, BRRR makes sense depending on what your goals are, which obviously can create lots of momentum for acquiring more properties at an accelerated rate, I mean who doesn't want to utilize economies of scale and have 20 properties within 5 years, you just have to be able to position yourself correctly to mitigate those risks, however, if you do what I do and grow slow you tend to feel safer in taking a more conservative position.

Either way I dont think there is a right or wrong position. Everyone starts out differently, yet I would not preach my way is best. As of right now, I like paid for and clear, but it doesn't mean that at some point in my trajectory as an investor, I might be better off to look for an accelerated growth model, which BRRR could provide. As long as your risk is a calculated one and you are all in, there is greater chance for success than failure. I would rather learn the ropes with paid for properties and then perhaps branch out in BRRR fashion.

Originally posted by @James Moore :

I have a few units and they are paid for. This position is preferable in my space. Since I am starting out my niche at the moment is buying small units (1bd/1ba) avg 600 sqft, where I shoot for an acquistion cost of 15k per unit, and then fully rehab with an all in cost (including purchase and rehab totaling 50k). Bascically with that said, I have a brand new home worth 75k+. Investing within a smaller footprint really helps keep all cost down, which is something I like, and provides maximum yield.  

On the flipside, BRRR makes sense depending on what your goals are, which obviously can create lots of momentum for acquiring more properties at an accelerated rate, I mean who doesn't want to utilize economies of scale and have 20 properties within 5 years, you just have to be able to position yourself correctly to mitigate those risks, however, if you do what I do and grow slow you tend to feel safer in taking a more conservative position.

Either way I dont think there is a right or wrong position. Everyone starts out differently, yet I would not preach my way is best. As of right now, I like paid for and clear, but it doesn't mean that at some point in my trajectory as an investor, I might be better off to look for an accelerated growth model, which BRRR could provide. As long as your risk is a calculated one and you are all in, there is greater chance for success than failure. I would rather learn the ropes with paid for properties and then perhaps branch out in BRRR fashion.

I have typically used this same model. I bought properties with cash (all distressed and well below market) and now have the rental income as cash flow (after Taxes, Ins, etc). I could certainly cash in on the equity and purchase more, but it decreases my cash flow per property and complicates my business. Right now, I work full time and manage my properties on the side. So a balanced and conservative approach works for my current lifestyle. Once I have enough properties to utilize the BRRR and invest full time as a primary profession, I will do so. But until then (ideally within the next 5 years), I will continue my cash purchase, rehab/hold strategy.

Would be interested in others thoughts on that though.

Hi Michael, I am glad to hear you are doing well. Appreciate the reply. I think many of us have to begin somewhere in a somewhat humble position starting off. For me that has meant picking an older neighborhood that is mostly made up of working class individuals and families. I have met investors that have had rentals in better areas of town and carried a mortgage on the property. I honestly feel I am (and you may agree) that there is an advantage to chugging along perhaps more slowly buying for cash one property or two at a time and rehabbing them.

In my market, most local mls properties are over priced making it hard to find great deals. We would really benefit as a community from having realtors price more destressed properties at wholesale values.  I buy what the 90 percenters would overlook and I then add my secret sauce during rehab and end up with a great property that I would be proud to live in. I am thinking in terms of what I call BRRFR. (buy, rehab, rent, flip and repeat). That is build up a quality portfolio of several properties and flip the portfolio into a 1031 exchange and buy an apartment complex, which is what many multi-family apartment investors end up doing as they get bigger and bigger. I think having a concentration on speed and getting there as quickly as possible can be rewarding but also more risky. But like I said, I am not someone to preach one way is best. Thanks!