BRRRR Thought Exercise

[Bryan Hua]

Hi Everyone!

I am currently a second year college student studying Accounting. I have been reading and studying real estate investing for a little less than a year and I have a ton of questions that in my mind and I hope that I can learn more from everyone in the forum. I do not have too much knowledge about real estate, but I hope I don't sound too naive when I ask these questions. I've read a lot of posts about the BRRRR strategy, but there are still some questions I still have.

Anyway, I have been wondering about the BRRRR method and its advantages and disadvantages. So under an ideal situation, I could buy a house with a 20% down payment and rehab, rent, and refinance it. Ideally, through the refinance I would be able to pull out the down payment that I put into the property + the cash I put into rehabbing the property + enough cash to payoff the first mortgage I initially had on the property. The questions I have are:

1) Since I refinanced the property and it ideally appraises at a higher value, would the higher LTV decrease my cash-flow I receive on the property?

2) Assuming it does cut into your cash flow, why then would an investor use BRRRR as part of their investment strategy?

2a) What are the inherent risks to owning a large number of properties that are highly leveraged?

2b) Is there a way to manage the risk of owning many highly leveraged properties other then having reserves and implementing efficient business processes to minimize vacancies and other expenses?

Now going off of that scenario, would it be a sound idea to use the remaining cash I pulled out from the refinancing to put down as a down payment on another rental property to repeat the process? If I were to do this then the new property would technically be financed 100% because the capital I use for the down payment is a liability/loan from the refinance.

1) So assuming I find a rental property that still cash flows at an amount that meets my criteria, would it still be a sound investment even if it is 100% financed?

2) If I had reasonable cash reserves (enough to cover unexpected CapEx + 6-9 Months of debt services) would that change the decision rule in this scenario?

Under a different scenario what if I had used the refinance capital as part of my down payment but lets say I use 20% of my own equity + 20% of the refinance capital as part of the down payment. So the down payment would essentially just be 40% in total.

1) Would the bank allow me to request a 60% LTV mortgage or anything lower than 60%?

2) What are some effective ways of using the capital from a refinance other than buying another investment property or covering future rehab costs? 

3) Could you save the refinance capital as a reserve for future unexpected losses?

I hope this all makes sense and I apologize for the post being so long. If you have any questions or need clarification please feel free to ask! I apologize again if this seems like something that would never happen in real life I was just curious as to how the mechanics work.

Thank you everyone!