BRRRR heading into growth phase - what am I missing?

Question

I'm a bit slower than some when it comes to real estate investing. 
Hubs and I bought our first duplex in 2007, our second in 2009, 
renovated them, rented them out, and have held them ever since. It 
really never occurred to us to do anything other than hold onto them 
forever, enjoying a cash flow increase when the mortgages are paid off.

I just recently realized (I know, I know!) we can sell these and use 
the considerable cash equity we have in them to buy two new duplexes, 
for cash, then wait a year and get a home equity loan and buy two more, 
using the rental income to "cover" the extra mortgages with a DSCR 
loan.

Since I'm new to this BRRRR idea, it seems too good to be true. 
Apparently we can just keep doing this forever without adding any new 
cash into the system? What am I missing?

For those of you into the details, we have around $500K in equity in 
each of the properties we currently own, and we're looking to purchase 2
 duplexes that cost 500K each with cash using a 1031 
exchange, (essentially just replacing the old properties with new ones 
in an area with higher rents) and then doing a cash out refinance a year
 later after the properties stabilize, to buy two more for around 400K 
each, cash. We then rinse and repeat.

I KNOW I sound like an idiot to you all, but this seems a little too good to be true and I think I must be missing something.

Is this the right approach? Is there a better one? Thoughts? TIA!

Nicholas L. · Answer

@Katherine Waddell

not sure if you're missing anything or not on the process - but if you buy something on market that doesn't need a lot of work, at today's interest rates, you likely won't cash flow anything. zero.  especially with a HELOC - that's expensive debt.

given when you bought the ones you own, your cash flow on them is probably fantastic.  if you sell, you'll lose the interest rate you have and be moving into properties with a much higher cost basis.

i'm BRRRRing right now and i look to break even when i'm done.  the point is the equity gain.  and to do this you have to buy something distressed.  if you buy something on market with no value add, it doesn't work.

hope this helps - happy to dialogue further

Dean Harris · Answer

@Katherine Waddell  Welcome to BP!

I LOVE TO BRRRRR!!!! I have completed this strategy personally over 50 times in Memphis, TN. Additionally, I have worked with buyers hundreds of times over the years to complete the BRRRR. My banks love it, my houses are in good shape and my tenants are satisfied!

You are not missing anything. I do not leave money in my deals. I use cash or my LOC, refinance and then pay the LOC off or pay back my cash account.

Best of luck to you and please don't hesitate to reach out with questions!

Marcus Auerbach · Answer

You got the BRRRR part right, but what you are overlooking is that you are paying an OOS premium to the tune of 20% when you start working remote.

You have to pay someone for things you'd do on your own, you don't know the market that well, the contractors may charge you a little extra or not work as well being unsupervised - it ads up quickly, I'd say about 20% compared to someone local.

Dominic Mazzarella · Answer

I think Nicholas gave you the main issue. The strategy can work, but it usually only works if you’re buying with a real value-add or distress angle.

If you sell great low-basis properties and replace them with cleaner assets at today’s pricing/rates, you may end up with more leverage, more moving parts, and not much better cash flow. I’d stress test the whole plan assuming lower refi proceeds, higher expenses, and at least one property taking longer than expected to stabilize.

Denise Supplee · Answer

Hello@Katherine Waddell!! You definitely don’t sound like an idiot. Honestly, you’ve done what many investors wish they had done years ago: bought good properties, held them, and let time build wealth.

The strategy you’re describing can work, but I’d focus less on the “rinse and repeat forever” part and more on whether each move improves your cash flow, returns, and overall goals. Every refinance and purchase adds some risk, costs, and management responsibilities.

After 40+ years in real estate, I’ve learned that equity sitting in a property isn’t necessarily your best friend if it’s not producing a strong return. Sometimes redeploying that equity makes sense, and sometimes holding a great asset is the better move.

Another option to consider is co-investing. It can be a great way to put some of that equity to work in larger deals, diversify into different markets, and potentially reduce the day-to-day landlord headaches while still benefiting from real estate ownership.

A huge positive here is that you’ve built enough equity to have choices. That’s a good problem to have! 😊

Ashish Acharya · Answer

Hey Katherine, you definitely don't sound like an idiot, all investors are learning along the way, and jumping in is the hardest part. Like Arman said, you already did that just by investing and holding.

Nicholas makes a really valid point about cash flow at today's rates and cost basis and looking for distressed properties when BRRRRing. From a tax perspective, when you 1031 into new properties, your carryover basis from the old ones rolls in, so the depreciation clock doesn't fully reset. Any additional cash you bring in gets its own fresh schedule, and a cost seg study on the new properties can accelerate a good chunk of that into year one, which helps the overall return picture and tax savings to reinvest.

On the cash-out refi side, refinance proceeds aren't taxable since it's debt, not income, so that part of the model is solid. Like others mention it can come with it's own risk, but the key is stress-testing cash flow on the new properties at higher vacancy and expense scenarios, not just the baseline numbers, to make sure there's enough cushion when things don't go perfectly.

You didn't mention other income streams, but if you have significant W-2 income or business income, there are strategies worth exploring, like real estate professional status (REPs) or the STR loophole (you'll see these mentioned on BP a lot and they are typically a big reason why people do get into real estate vs. just passive income).

You'll definitely want a CPA who specializes in real estate to help you work through those and make sure you're not leaving anything on the table, especially if you want to scale. Getting a CPA involved before you sell anything is really important so the exchange is structured correctly and the tax picture on the new acquisitions is mapped out from day one. Best of luck and happy to connect!

Dave Foster · Answer

@Katherine Waddell, This is a very common and powerful strategy. It's how a lot of investors scale into larger investment opportunities and tap into better markets. Taking advantage of the deferred tax and reinvesting in properties with more cash flow and appreciation potential repeatedly till they want to consolidate and find a property they eventually want to retire in. Eventually, when they pass away, they can leave it to their children or grandchildren to inherit at a stepped-up basis, and all the tax goes away.

There's your whole lifetime game plan.  And what isn't included is paying tax because you're doing 1031 exchanges.  But there is one flaw in your plan that you need to address.  When you do a 1031 exchange, you still have to purchase at least as much real estate as you sold.  And you have to use all of the cash proceeds (equity).  So, let's just say that you have that $500K equity, and the properties will sell for $800K.  You have to purchase at least $800K of real estate using all $500K of proceeds.  While you don't technically have to take on new debt, you do have to replace that amount of debt somehow if you want to defer all taxes.

Here's a great opportunity for you.  If you sold both and started exchanges on each to get that $500K of equity in a 1031.  You can allocate those proceeds anyway you want.  Which means you could buy one duplex for $400K cash.  And use the other $100K as a down payment for a second duplex of $400K.   I know that doesn't add to your number of units.  But it does concentrate your equity, so you could refinance that cash property immediately whenever you find the next duplex that you like.  Or you could just spread that $500K of equity across several duplexes.  Whatever works for you.

Nicholas L. · Answer

@Katherine Waddell

i sent you a PM, happy to connect on this.  you may know this already, but if you buy in cash and then cash out refi with no value add, it may be quite expensive.

Aaron Zimmerman · Answer

What's your return on equity on your current properties? You could do a cash out refinance on your current properties if you so chose and then use that to buy the next.

BRRRR heading into growth phase - what am I missing?

Most Popular Reply