Are there any BRRRR disadvantages

[Wesley Mitchell]

I was wondering what type of disadvantages or risks comes with using the BRRRR strategy? I own a home that is fully paid currently if i use that (HELOC) to pay for another which i then rehab, rent, cash out refi for another so on and so forth i will have multiple loans out at the same time. I understand if they are cashflowing the properties pay for themselves. Is the anything that could happen to stop the progress of the investments or worse cause it to stop or lose money? For example if the market crashes like 2008 is there a way that everything could be lost in one fell swoop? Or does the fact that you can sell the property counteract any and all problems that could arise?

[Scott Hollister]

@Wesley Mitchell

The above posts are spot on. For me it was buying right and financing right. The money is made when you buy. Your ARV should be accurate because the whole deal hinges on that. The goal with BRRRR IMO is to pay yourself tax free money WHILE keeping a cash flowing asset. This is how true wealth can be built very rapidly.

The opposite is to keep plunking down 20-25% on investments. But you must have deep pockets for that strategy or partner with someone who does. 

The two worst parts that come to mind in your situation are: 

1. You have to leave money in a deal. Example, the property will not appraise to your original projections. (But on the bright side you still have a cash flowing asset)
2. You will get stuck on the financing side. Your debt to income is off, seasoning requirement not met, loan extensions if you decide to go hard money or private, etc. 

My thought process on the BRRRR when I look at property: 

Goal: I want to leave $0 in the deal and I want the property to cash flow with bank debt. 

• So if it appraises for 200k and your getting bank debt at 75% LTV.
• That means my ABSOLUTE ceiling is 150k minus the closing costs which I pay at time of refinance. 

Mine were $3,954.89 on a 148k 30 year fixed loan at 80% LTV in Connecticut.

So lets take 150k, minus your closing costs on the refinance. We have 146k to work with. It will require a $30k rehab with a 15% construction contingency. So $34,500 - $146,000 = $111,500 purchase price.

Don't forget to add in your holding costs, I put mine in the total construction budget. (Taxes, insurance, interest payments, water, sewer, snow/lawn, electricity, gas, etc.)

The worst case: 

• Low appraisel
• Another CRASH happens. But hopefully you're not buying into artificial inflation or buying for appreciation. If you buy for cash flow, you "should be" fine. Again, budget worst case scenario of decreased rents and offering concessions. 
• Inability to acquire long term debt and favorable terms.

The Solution: Have multiple exit strategies.

• Fire sale. Can you always get ride of it for what you have into it? 
• Stay under 65% LTV. There is a reason that HML lenders won't lend above this limit...
• Sale to general market. Maybe your strategy goes from holding to flipping. 
• Private financing with someones ROTH, etc. 
• Conventional financing
• Commercial financing based of DSCR

All in all I think your HELOC strategy will work great, you won't be pressured to get out and you will have a cheaper interest payment in comparison to other lenders. The only downfall is that your primary residence is on the line if you fault on the payment. But this all depends on your risk tolerance. Remember that you make your money on the buy side:)