Need Help Understanding BRRRR Refinancing

[Nico Timpani]

Hi all,

I am a relatively new listener to the BiggerPockets podcast and have no real estate investing experience. However, I am thinking about getting into it and want to learn as much as I can before diving in.

That being said, I am having some trouble wrapping my head around BRRRR, particularly when it comes to the refinancing part. I know that this is a topic that gets discussed a lot, but I haven't seen anyone answer my specific question. So here is my understanding:

Buy - Suppose I buy a house with my own money for $80K

Rehab - I spend $20K fixing it up and the ARV is $130K (so I am $100K all in at this point)

Rent - I rent it out instead of flipping, which also helps with the refinancing. Let's say I can rent it out for $1000.

Refinance - So I go to the bank and do cash out refinancing and let's say I get the $100K I put in back. So now I have ~23% equity and $100K in cash.

QUESTION: What I haven't heard talked about is that now I just went from having no mortgage payment to having a mortgage payment on a $100K loan. So yes, I got $100K in cash, but now I have a mortgage payment cutting into my cash flow. So based on a quick cash out refinance calculator estimate with a 4.3% interest rate, I got a monthly payment of ~$700. So now I go from having a cash flow of $1000 per month to $300. Over the course of 30 years, that adds up to about $252K in lost cash flow from paying down the new loan. So I understand the time value of money and being able to make another deal, but wouldn't I also be losing out on a ton of money over the course of many years by doing this? It seems like if I was only occasionally buying rental properties, it wouldn't make sense to BRRRR. Assuming all of this makes sense, how frequently would I need to buy properties for BRRRR to work?

[Jeff Copeland]

Your assessment is more or less correct (though you can probably expect to pay a higher interest rate on an investment property mortgage). 

It all depends on your goals - if you want maximum cash flow in the short term, then by all means pay cash and carry no debt. The problem with this is it isn't very scalable - you'll eventually run out of cash. 

BRRRR lets you build a portfolio of rental properties using other people's money. 

To really see the full potential, carry it forward 20 years. Let's say you stopped building your portfolio after two properties because you ran out of cash and wanted to maximize your cash flow on those two units. 

Whereas, Person B used the BRRR method to acquire 27 rental properties, and (for the most part) his tenants paid them all off with 15 year fixed mortgages. He sacrificed short term cash flow for long term equity, cash flow, and basically...wealth.

Who is enjoying the better retirement income in 20 years?