Logic behind refinancing?

6 Replies

Hello,

I currently own a rental property and am looking to buy another. My question is there is popular talk about the "BRRR" which I love the concept, I'm not trying to knock it at all. I am just confused at how the refinancing works because I've never done it. However, I have done some research and am a bit confused. The idea is to have cash flow and build equity in a home. If I buy a home for $65,000 and have a mortgage of $350/month plus expenses that add up to $1,000/month; then rent it for $1500 I now would have a positive cash-flow of $500. But then I refinance for $120,000 which would free up approximately $55,000 which is great, but then decrease my cash flow to only around $250/month after refinance. This would be the ideal situation in my mind but if my cash flow is only $250 a month to begin with I would then in theory loose all of my cash flow. So it's great I got to free up the extra cash but now I have a property in which it's not cash flowing or not nearly as much and I'm supposed to keep doing this? Obviously the numbers aren't perfect and I'm obviously missing something, so again I am not trying to knock this strategy at all I would just love more of an explanation as to how it's supposed to work. Hopefully I explained this question okay. As always love and appreciate all the advice!

Thanks,

Jake

@Jacob Trimble so the idea behind the BRRRR is that, ideally, your own cash invested is zero. So while your cash flow may be reduced from $500 to $250, would you rather invest $55,000 to make $500/mo or make $250/mo without investing a dime?

@Jacob Trimble the best way to understand this is to crunch the numbers using different scenarios. What you'll find is your return is higher when you leverage your money.

Here's an example of a property I analyzed recently for another investor:

Notice the highest return on my investment is the first year and it diminishes after that.

Also notice I have $103,067.64 in equity on year ten. I could cash the equity out and buy a second home or possibly even two more homes. My annualized return would jump back up to 30% or more instead of 18%. I would also be cash flowing and building equity on three properties, tripling my return in that regard.

I hope this helps.

Cash flow reduces when refinancing, but you can add more property to your portfolio. Then, your tenants pay the mortgage down. I believe this method is good to acquire multiple properties that will be paid down by your tenants. This is a long term play. Once they are paid down, the cash flow increases greatly. You can’t rely on this method to pay for your way of life in the short term. I think it’s best to use this strategy when you still have good income from a w2 job. I’m using this method currently, and expect it to be my retirement income in the future.

The idea is to pull out all your money, any in excess of that is just a bonus. In the situation you've mentioned, you get $55,000 back and are paying down principal while the property will, over the long run, appreciate. That being said, you should target markets with the BRRRR strategy where properties will cash flow even when they're financed.

Just remember that BRRRR is a short version of the true process. It is missing the S for Seasoning and the RO for Rip Off costs and P for pain. (recently discovered late by a befuddled brrrr-r)

As long as you are aware of the full acronym BRRSRROP which will include the $4k closing costs and the 6-12 months seasoning, but is still light on the P&S, pain and suffering, that a refi is. Cheers!