Confused about BRRRR

[Amy Gullotta]

I'm sure this has been addressed in previous forums, or there may even be a link that dumbs this down for me. But here goes...........I've been listening to the podcasts everyday. I've been reading the forum success stories. I am still struggling with the BRRRR concept. I feel I'm properly set up to start it, but here is what I struggle with that I'm not seeing. 1) What kind of interest are private money lenders charging in the onset? Are they just people? or companies? or what? Is it normally a balloon payment assuming a successful refi happens? I never see the interest taken in to consideration for the "Cash returns".

2) How are you all compensating for the higher mortgage on the refi? Just randomly charging the tenants more money because we chose to redo the mortgage? Or is this already considered in the initial budget when deciding to purchase? Otherwise the cash flow goes down correct?

3) I understand why you would do the cash out refinance and turn around and reinvest that into another property...is this to be able to do the 1031 exchange? and if so when it is "deferred" at what point do we pay the tax?

4) If you are financing the second, third, fourth etc..properties, aren't the DTI numbers astronomical? As a former lender, I have no idea who gives someone that many loans based on rental income alone, as well as who does cash out refi for more than 78-80% LTV?

5) Is no one taking into consideration the "cost" of the loans in the first place? The amount of interest they pay, is that being calculated as an expense?

As a realtor and former lender, I don't know how I'm not understanding, so I decided to bite the bullet and ask. I don't want to get stuck in the "over-planning" process, so if someone could help until I'm able to find a mentor in my area, that would be great! Here's what I have going for me.....

I have a mortgage on my primary residence...I've lived there 18 months...It's worth about $125k, I owe $97k...I have about $25k in cash. I'd be willing to move and house hack if need be. Credit score in high 700's. I have a pretty flexible full time job with steady income. I have a real estate license. I can do this right?

[Dave Foster]

@Amy Gullotta, The BRRRR strategy really doesn't have anything to do with 1031 directly. It stands for (I think) Buy, Rehab, Rent, Refi, Repeat. So it's premise is that you are refinancing properties at new higher values to generate cash to buy more distressed property to add value to and then refinance etc etc. Refinance money is not taxable. So as long as you own the property tax on the gain is always deferred. Anytime you sell a property and do a 1031 exchange you will defer the tax into the new property so as long as you own that property you will never pay tax.

The only way you pay tax is you sell a property and do not do a 1031 exchange.

But before everyone sticks their tongues out and says, "see I told you you had to pay someday"  let me give you three other options rather than to simply accept the "inevitable".

1.  Die (not the best option).  Your heirs get the property at a stepped up basis so the tax disappears for them.   You're dead so you don't care.  You didn't have to pay.

2. Keep 1031ing and using those tax deferred dollars to buy more real estate of the type you want and gradually shift it to passive or low maintenance real estate vehicles so your work load is reduced.  Collect checks for a long long while and then see #1.

3. Every once in a while convert a rental into your primary residence.  Live in it for a few years and then sell and take part of the gain tax free.  (All right you do pay some tax but not all the tax at least)