BRRRR & Over-leveraging Question

[Alex Shapiro]

So I just had a discussion with a retired family member who made her money (millions) in real estate. I brought up the BRRRR strategy and she got upset that I brought this up as an actually viable strategy. She asked, "well what do you do with the crushing debt service?" She said that she lost me at the refinance stage, and that pulling out all of the equity to just go buy another property creates a crushing debt service and is not sustainable and reckless. Every time I would indicate that the BRRRR strategy allows you to build a real estate portfolio with leverage and that the tenants pay down the mortgages she would say that the world is not perfect and things will go wrong, this strategy over-leverages you and creates a "crushing debt service." She asked me where I was getting this info and pretty much implied that I was getting this strategy from a fraudulent guru and that I was misguided. I tried to argue that using leverage is a smart strategy to build a real estate portfolio. I then brought up out-of-state investing, and she almost lost it. Lol.

So there were have it: how should I have responded to her questions? Is the BRRRR strategy not as cracked up as it seems? If it is a great strategy, how do I convince someone like her to accept it as legitimate? Is the BRRRR strategy more geared to a younger real estate investor, dare I say.. new school?

[Frank Wong]

Hi Alex,

The problem with BRRRR is most people do not know how to use it properly. They leverage way too much and their debt service is too high. Your retired family member is correct about the "crushing debt service" Remember she knows what she is doing she is the one worth millions.

I think the idea of BRRRR is great and it certainly gives a new investor a chance to scale and buy multiple properties. The problem with that is you will be killing your cash flow while increasing your risk. If you don't have enough reserves and the market turns. Goodbye, you're done.

At some point, you will need to add fresh money into new purchases.  You cannot just keep refinancing and cashing out to buy more properties with more debt.  Just run the numbers the debt load gets scary. 

If you are looking to make $200 a door and want to make $8k a month that would be 40 houses.  That is a lot of loans and a lot of risks.  I can achieve the same $8k with 8 houses paid off in cash. I get I won't have an appreciation of 40 houses but I also have no chance of losing it all.  Appreciation is not a goal at this point high net cash flow and more time to spend it is what I want.

As long as you understand risk and leverage you can utilize BRRRR. For me, I am with your rich family member and owning my properties free and clear.