I am still new to BiggerPockets and real estate investing, so I am churning through the podcasts and soaking up the information on the forums, blog posts, and in books. I plan on house hacking my first property and buying and holding SFRs and multifamily properties thereafter once I begin investing.
I find the BRRR strategy very intriguing for its ability to generate passive income and provide a pay day down the road (if you find the right deal). I see it as a hybrid of buy and hold and flipping. However, I would like to buy a couple of properties to gain experience before jumping into BRRR. I have two general questions re: BRRR:
1) If the first loan for the property is funded with private or hard money, what is the process of paying that money back to the lender once you refinance? I understand that you take the funds from the bank loan to pay off the lender but if you are paying back the original lender early, do you pay them the entire principal and interest that would have accused for the time you agreed to? For example, if you borrowed $100,000 from a private lender at 8% interest with a maturity date of one year but you refinanced the property within 8 months, would you pay the lender the $100,000 plus the full 8% interest? Is it in your best interest to pay off the lender as soon as possible once you refinance? Is there a penalty for paying the original loan off too early?
2) What are the downsides of the BRRR strategy generally? I do worry that if I employ this strategy and start acquiring 1-2 properties a year, I will become over leveraged with too many mortgages, which can be risky in a market downturn. I would welcome everyone's thoughts and opinions on this.
I haven’t borrowed from private or hard money lenders but my understanding is that it is often an interest only loan, you pay the interest rate only until you return the principal.
If the strategy is done right, you should have enough equity in the property to weather any downturn. You force appreciate and keep your sweat equity in the property.
Thanks @Sung Park . The interest only loan makes sense. What if you fund the deal with a conventional loan? Do fees generally apply for paying off a conventional loan early?
Have you been able to BRRR any properties in Philly? If so, what difficulties have you run into? What areas seem to work best for BRRR? I assume South Philly would be one of them.
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