Managing Debt while building wealth

[Benjamin Sampson]

I have been listening to bigger pockets podcast for about a year. I hear lots of great stories about how the BRRRR has helped build wealth and I understand it in theory.

By doing the BRRRR strategy you are creating passive income, growing your net worth, but at the same time growing the amount of money that you owe the banks.

One thing that is still unclear to me is how people doing this strategy are continually able to borrow money from banks when their debt amount increases also. 

Does an investor have to have a ton of equity or capital somewhere else to leverage the increasing debt that comes with building your investment portfolio? 

(I am in the ‘pre investment’ education mode right now, not yet ready to pull the trigger on it...that’s another post🙂)

Thank you!! 

[Nathan Milholin]

Hi Benjamin,

This is all going to be rather dense, so take it one sentence at a time. It takes time to wrap one's head around. I think the concepts of creating equity and pulling out your original equity contribution are central here. Also important is the type of mortgage loan you're getting. If we're talking single family rentals, or up to a quadplex, my understanding is that most people who continue to leverage their properties do so by finding and forming a relationship with a small regional bank or credit union that is willing to lend based solely on the value of the underlying asset(s) and/or the income from the properties. This is often done with a portfolio (or "blanket") loan, which includes several properties. Personal debt-to-income ratio is not a consideration for underwriting these loans.

In the alternative, some people go to private lenders (in simplistic terms, groups of wealthy people who have pooled together to form a mortgage company) who are willing to lend on investment properties that banks are not willing to underwrite. The trade-off is that these usually come with a higher interest rate.

With regard to the equity/capital--equity is created in the BRRRR process, which usually allows one to pull out their initial investment and reuse it as the equity contribution to their next deal. There needn't be a 'ton' of equity, simply enough to support an appraisal of the asset that allows one to refinance their entire investment out. This is why everyone says that you make your money when you buy.

My first version of response to this included an overly long explanation of the deal math that goes into creating equity. If that's unclear, I can try to explain.