I was learning about the BRRRR technique and I had a question based on the R for refinancing. I was wondering if after refinancing the property, would the monthly mortgage increase?
Yes, substantially so. I am not an advocate of this "strategy" and would advise against it.
One can not answer this question with out alot of knowledge of your situation before hand. One needs to know how you financed your property to begin with.
For example, if you buy the property with a Hard Money Loan at lets say 12%, then you turn around and refi after rehab at 5% then most likely you will have a lower monthly payment.
However if you pay cash for the property then turn around and refi then yes you will have a sudstanially larger payment, because you didn't have one to begin with, with a cash purchase.
It also depends on how much money you pull out of the property when you refi as well.You can obviously play with this number to an extent to make the terms work for in your favor
Real estate is a numbers game... You have to go into the deal knowing or at least have a very good idea of what you can and should expect from that particular deal. This is where due diligence comes in and also why so many new investors lose money on their first deals. No two deals will ever be the same, especially when rehabbing.
Curious as to why you advise against this technique?
If one were to implement every step of it successfully, and upon refinancing were able to pull out all the initial capital they had invested, and reapply it to another property, what's not to like about that?
The property stands a good chance of cash flowing, the tenant is amortizing your loan, you receive tax breaks, and you even have the possibility of appreciation. Meanwhile, since you have $0 cash out of pocket invested in the property, your returns are infinite.
Even if GREAT deals are hard to come by and you have to leave some money in the property, say $5 - 10k, it still appears to be a very sound investment to me.
I agree with Jayson in this one. It's a win win situation if you make sure the numbers work out prior to getting the deal done.
@Jayson Edwards I see several problems with this method: most people that use this method are desperate for cash and desperation will set you up for a world of trouble. I also see it as kicking the can down the road, your leveraging as much as you can with the hope of having enough cash flow to outrun impending problems. Warren buffet has a saying that goes something like this, "you can tell who's been skinny dipping, once the tide goes out". The brrr strategy seems great as you get more properties and activity, however your payment then goes up and insurance increases along with your risk. Imagine this: it's 08 and you've been successfully using this strategy and then suddenly the market collapses. What will you do when your properties are over leveraged, your tenants lose their jobs, or can't afford to pay as much rent and then you get that call that informs you that your roofs leaking, your hvac is out, etc... this happened to me and thankfully I wasn't using the brrr method. I dropped the rent, used my savings for repair and shopped for bargains. Dozens of "more intelligent that I", investors in my community list everything, including the second wealthiest man in town. If you don't think a market correction is coming, then may God have mercy on your finances. No judgment here, just answering your question. :)
I agree with @Perry Ivy that there are many moving parts, and the property becomes highly leveraged.
However this is also 1 of the advantages of real estate by using OPM. By recycling the cash again and again as long as one buys it right just like @Jayson Edwards and @Paul Siljee . AND more importantly have reserves.
Just curious, Perry what is your investing strategy?
2008 affected everyone including your mom/pop's buy and hold rentals.
@Chris T. During the last downturn I was a buy and hold guy, I bought distressed, repaired them myself and work hard to pay them off. Although I was affected some, I had zero stress about the downturn.
Now my strategy is similar, but has had some changes. I'm still a buy and hold, but I do an occasional flip and I also build and develop. I sub it all out now and I still work hard to pay off the debt that I incur. I roll my profit from the flips and new construction into my rentals.
thank you for sharing. Do you pay off a mortgage before you acquire another property?
I am changing part of my strategy to flipping as well, but use those profits to buy a rental in a A/B neighborhood w/ cash. Then BRRRR it.
When do you think, in your opinion, the next correction is going to come?
@Chris T. Thanks for giving me a chance to vocalize my opinion :)
I'm willing to assume some risk, so I do acquire additional properties before paying one off. Most people do the brrrr strategy because they need funds and can't get it any other way, if my banker is hesitant about loaning me money, then wouldn't I be wise to take a money to examine why? I don't have a problem getting bank financing, but I have had a banker to ask me to do something before buying additional property. I initially was upset, but she was right and I wasn't seeing things clearly. Concerning the market correction: I don't have that looking glass, but I believe it's close. I purchased a house this year for 49k, put about 30k in it and it sold for 122k. This was in a b/c neighborhood and the surrounding houses were about 60-90k properties. Why is that strange? It's because I was going to hold it, but was pestered into selling. In my opinion the bank shouldn't have made this loan as it was way overpriced. I sold one in the hood for 65k this year, I had purchased it for 27k. Everyone is investing in real estate these days and very few have a clue about what their doing. Corporations blindly buying properties. I believe we're really close, so be prepared. Thanks again
@Perry Ivy Absolutely! BP is a forum where we all share our different points of view
Not sure if you saw this tread going
With that being said, are you moving more into a cash position in regards to real estate?
@Chris T. I'm not sure what you mean by cash position, if you mean storing cash for purchases, no. I am aggressively paying down debt and yet buying properties. The deals I make, I would make in a down economy. Let me ask you a question. If you were a banker and a guy came in that did the brrr strategy and he had borrowed 85% of all his properties value. Then you had another guy to come on that only borrowed 50% of his properties value, who would you trust more and be willing to work with? I just purchased a house for 60k, put close to 30k in it and expect the appraisal to come back around 130-140k. I don't have trouble getting loans and don't need the brrr strategy, the no money down, or the hard money loan. There again that's my strategy and to each their own.
@Perry Ivy - I respectfully disagree with you and don't think you fully understand the BRRRR strategy. You can buy a $100k property and put $25 k down or you can buy it for $45k put $30k into it and refi it and get all of your money out.
In both scenarios you are at 75% LTV which is not extremely highly leveraged. The problem with putting the 25% down payment is you will at some point run out of capital for more purchases which is why BRRR continues to let you recycle your money with the repeat R. I care about my ROI and would rather have an infinite return and be able to build equity rather than buying it...
You need to buy a very good deal and make sure it has strong cash flow to protect against your concerns of downturn. I invest for income for the long term so I care less about values now because I'm not selling. Hope this helps you better understand this strategy.
@Eric Munson it sounds like your comfortable with your strategy as I am with mine. I prefer to keep my cash in my properties and make more cash to put in via flips and new construction. Like I stated I don't have trouble getting financing and don't mind moving slower than the next guy. I've been to the courthouse many times and watched people's investment get auctioned off. Cheers
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