Analysis Paralysis Using BRRRR

[Christopher Stacy]

Maybe I just don't fully understand the BRRRR strategy. It seems like a great way to not only get started in real estate investing, but also a path to build a rental property empire, which is what I am very interested in. However, I just don't fully understand the rationale behind carrying so many mortgages at one time. I understand the leverage perspective and alternate financing options like hard money lenders and seller financing, but there is a risk aspect to consider that many people, like me, want to avoid at all costs. Risk that increases with each property that is mortgaged or financed. So, how do you pull this off while minimizing or mitigating risk? If only you pursue the conventional mortgage route and are lucky enough to get bank financing for all of your properties, you could be looking at nine mortgages for ten properties doing BRRRRs and that is scary. Or do I not see the forest through the trees?

I am a visual learner, so while the blogs, posts, articles, podcasts and books on the subject make sense, I just can’t see how this unfolds for more than a few properties. I am wondering if there is a past blog or post that graphically depicts how this can work. My goal is to acquire seven properties in the next seven years for a total of 10 and then I’ll reevaluate. For the purpose of this inquiry, we’ll just start with 10-properties to keep it simple.

Brandon Turner and other BP contributors explain this strategy very well and make it look so simple in their articles – they are well-written and easy to understand. However, they don’t take it farther than just a couple of properties. Some mention the snowball effect to keep it going and even discuss risks like not being able to refinance, bad tenants, etc. But how does this play out after just a few properties? What does it look like if your goal is to buy 10 properties in 10 years? I believe a picture is worth a thousand words so… I challenge you, BiggerPockets community, to show us newbies a graphical representation of how this looks like for 10-properties.

I consider myself a newbie because I only have three properties under my belt and I carry a small mortgage on only one. At this point, I am ready to "Repeat," but I am more concerned about carrying multiple mortgages than being able to refinance. For example, let's say that I buy my first property for cash and it has an ARV of $150,000 using the BRRRR strategy. I am going to skip past the "B" and the first two "R's" for simplicity and to get to the point of my inquiry, which is Refinancing and Repeating. So, if I choose to "Refinance" this first house, I now have a mortgage. Optimally, the rent covers the mortgage and provides me with some cash flow – I think that is one of the goals or byproducts one seeks with this strategy after all. Now I am ready to "Repeat." If I did a cash out refi on this property and the bank gives me 70% of $150,000, I will have $105,000 to invest in another property. If I find my next property for $105,000 or less, then I am in business. I can buy that property with cash, carry no mortgage, and use the rent from the 2nd property as well as the rent from the 1st property to pay off the 1st mortgage. So, this is where it gets interesting. Please bear with me as I unfold the scenario in my own mind in an attempt to better understand the strategy.

I go back to the bank for another cash out refi on the 2nd property and they give me another mortgage at 70%. If I “Rehabbed” this 2nd property correctly (or it is move in ready) and it is now has an ARV of $130,000, the bank will loan me $91,000 and presto! I now have 2 mortgages and I am ready to buy property number three. However, when you "Repeat" this a number of times, you get diminishing returns in terms of how much the bank will loan you. Of course this is assuming that you continuously buy properties for cash for the amount of money that the bank loans you (or less) and you put nothing else into the deal. If you don't stay under that cash threshold, then you probably have to come out of pocket for the difference unless you are getting a GREAT deal as Brandon advises. This is also assuming that you are putting down as much cash as possible or paying the properties off with cash (for the risk averse) and carrying no mortgage. I suppose, that if you are using leverage and only putting 20% or less down, then this changes things a lot. But I am an income investor who is risk averse and does not like being in debt. I choose to pay cash or carry a small mortgage (putting a large sum down) to keep my expenses manageable. If I carry many mortgages, my income is reduced and risk is increased. Someday I hope to replace my income and quit my day job, but I also want to keep the risk manageable as well. So how do I and the many others who want to avoid carrying multiple mortgages make this happen? Can BRRRR even work in a reasonable amount of time like my 10 year horizon without having huge debt? Do you have to leverage heavily for this strategy to work or can you do it buying at or near retail?

This scenario is nothing new and I am sure most, if not all of the BiggerPockets community has seen their fair share of this type of example, but I would like to challenge the community to take a look at it from a different perspective and draw a graphic of some sort to tie this all together. I started to build an example in PowerPoint to try and figure this out in a graphical manner, but I hit analysis paralysis and decided to reach out to the BP Community for assistance. Can anyone help me figure this out? Thanks!