BRRRR - Double Edged Sword?

Question

Curious about the BRRRR method. For the sake of cash out, the goal would be the highest appraisal possible. But wouldn't a higher appraisal cause higher monthly loan payments which would reduce rental cashflows? This seems to be a double edged sword, especially with private / hard money lenders who want the cash back. Any information and expertise is greatly appreciated.

Joe Splitrock · Answer

BRRRR is equity stripping, meaning you take equity and convert it to cash. In exchange, you have a higher monthly payment. It is very important to make sure the property still cash flows with the new payment. The goal of BRRRR is not to increase cash flow, it is to take cash out to purchase more assets. It increases your cash on cash return and allows you to scale faster. I would call it a trade off rather than a double edge sword. A little added risk now for a bigger return later. But that is what investing is all about, the risk versus return. Higher return almost always comes with higher risk.

Keith Kellermeyer · Answer

Hey Brendan!

When using the BRRRR method, you use the ARV in your calculations for projected cash flow before buying the deal. You'll know at what loan amount your monthly payments will not meet your cash flow requirements. This is easily solved though!

Sometimes, BRRRR deals don't allow you to pull ALL your cash back out; you will end up leaving equity in a property. Let's say you bought a duplex, and to cash flow $200 a month, you have to leave $5k in equity during your refinance. That's perfectly okay! At $200/month cash flow, you have a CoC return of nearly 50% in year 1! At the 25 month mark, you've made that entire $5k back. This is the benefit of the BRRRR method - it works long-term, even in the unfavorable outcome of having to leave money in the deal!

Another scenario could be that, that $5k belonged to a hard-money lender. They require 12% ROI from that $5k. Year 1, they expect $5,600. Year 2, they expect $6,200. (This is a very basic breakdown, as hard/private money terms will most likely require a repayment monthly, but you understand the concept). By Year 3, the cash flow you have collected from the property over the course of the past 3 years has now paid back that hard money loan.

Higher Appraisal =/ the same level of increase in monthly payments. Here's an example:

You buy a property and the property is valued at $300k. When you go to refi, your loan amount will be $240k., leaving 20% in the deal. At 240k, 4% interest, taxes and insurance the same, your payment is $1429.13. Now, let's say the value is actually $320k. Your payment (interest, taxes, insurance all the same) is now $1505.52. You had a reduction in cash flow, but you were able to refinance to a loan of $256k, and pull out 16k cash for $76.39 less cash flow per month. $76 usually won't break a deal, if you need to pull more money out to payback investors :)

Let me know if this makes sense for you, or if you have additional questions about BRRRR, I can certainly explain this different ways, if you like :)

Hope this helps!

Stone Saathoff · Answer

It is a double edged sword from one perspective, but the end goal of BRRRR is wealth building. How do you build the most wealth in a set time frame? Get your hands on as many tangible assets as possible. So cash flow isn't the #1 priority. You want to be able to pull out as much cash as you can to get other deals.

Andrew Syrios · Answer

A higher value (i.e. loan) would cause higher monthly payments. I would see it, however, not as a two-edged sword but as a balancing act. You want to buy below market value and finance what you put into it. A little more is nice too. But you want to leave room for cash flow. That isn't easy, for sure. But no one (who was legitimate at least) ever said it was.

Brendan Harvey · Answer

Those are both great responses. I appreciate the feedback. I was asked by a private lender who stated their preference was to flip and pull as much cash out as possible. My response was that while there is often a difference between sale price and appraisal value, the terms of their loan would not be lessened by my profit (or cash out) value at the back end. Second I reminded them that once they were paid back with interest, whether I kept or sold the house would not change their risk or return rate.

BRRRR - Double Edged Sword?

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