BRRRR - too risky for newbies with little cash flow?

Question

HI all,

New to this forum and been listening to a lot of BP podcasts.  Hearing a lot about the BRRRR method.  I am having trouble understanding how people are getting past the Rent & Refinance and Repeat part.

If you refinance the home to take out your equity (so you can buy another property), then doesn't the monthly mortgage on this property go up?  Then it could be too expensive...and what if you cannot get it rented out or the current tenant leaves or stops paying?  You then need to come up with the mortgage payment yourself.  If you are bleeding money for 3-6 months...then you could be in some deep trouble?  Let alone that you could have already used the refi cash to buy another property.

I guess that is my fear...and not sure how people get over this risky hurdle?  Just feels like you are building a house of cards and one gust of wind and it could cause a negative domino effect.  I would think only the ones that have some strong cash savings or well connected people with investor backing would survive in this scenario...but for the guy that does not make a lot of money and just starting out....maybe the BRRRR method could be too risky?

Jen R. · Answer

I tend to be very conservative in my investment calculations, and have found the BRRRR strategy to be one of the less risky methods, if you are buying appropriately. First, make sure that you have more than one viable exit strategy when you purchase. We are buying properties that, once rehabbed, we have considerable equity in. This allows us to either refinance at 70-75% ARV and pull our initial investment out, or if something goes awry with the refinance, we could always sell the property and invest in another. Of course, the numbers have to work; the rehab + purchase price should come in around that 70% ARV mark, and you have to be able to charge enough rent to still cash flow well after refinancing. Basically, with the forced appreciation and resulting equity, you have options once the rehab is complete. Also, typically we have tenants in place before we refinance, so we already have rental income when the mortgage payments start up. Having some cash in reserves is of course important as well, as it is for any rehab project or rental business!