BRRRRR Strategy risk vs reward

[Joe Ratliff]

What is the risk of the BRRRRR strategy. It sounds good to be able to buy property, rehab it, rent it to a tenant, refinance, then take money out to repeat the process. I know that by doing this, you're building a passive income stream, but at the same time, you're also acquiring lots of debt. I just wanted to see if anyone out there can let me know the dangers of doing this strategy. Thanks!

[Peter Tverdov]

One caveat that many ignore on here is that if you refinance out with a higher mortgage. So if you buy a house for 200k, rehab it and it's now worth 300k and pull your money back out. Yes, you just recycled your money but you also shrunk your margin between rental income and expenses because your new mortgage is for 300k (just using an example) instead of 200k. So your expenses are higher. If rents drop and don't cover your expenses then it doesn't do you a whole lot of good to have that cash pulled out unless you are pretty diversified across various areas (A, B, C class, different geographical regions). It's why I prefer to do a HELOC instead of refi. I get money to buy other property and my mortgage isn't touched.