Aggressive Pre-payment vs. BRRRR strategy?

[Medi Sarwary]

Hey everyone! 

I have been struggling with one aspect of the BRRR strategy which is the refinance after re-hab. I see a lot of value in aggressively paying down the mortgage with the excess cash flow and personal income. I see funneling income in this way as a form of paying yourself first and the bank last. Thinking of all the interest the bank will make even before the refinance is unsettling to say the least.

Here is a scenario:

300K home payed at 20% down-60K. Ideally we wouldn’t buy if it didn’t cash flow in the first place so I’m picking nice round numbers just for simplicity.

Loan is 240K 30 yr. fixed at 4.3%

Monthly payments are 1,500

Rental income 2,000

Cash flow is 500/month

If we use the cash flow to pay down the mortgage faster we can pay down the mortgage in ~ 17 years and save nearly 80K in interest paid on that loan.

Aggressively paying down the mortgage by supplementing the 500$ in cash flow with an additional $1,000 in personal income we would pay the mortgage of in approx. 10 years and save more than 120K in interest payments. In addition the rent would likely increase after the rehab so that 500 cash flow would be more likely 6-800.

I know the opportunity cost is significant, there are many things we could do with that extra 1,500 over the course of 10 years (180K). But the refinance would increase our interest payments and balloon the life of the loan. We would have to pay 120K in extra interest and risk being over leveraged. On the other side we would have more that 2k of additional cash flow and can always go back and refinance our equity if an opportunity arises.

I don't know if I'm thinking about this correctly (I suspect not) so I appreciate any feedback! It seems to me that the BRRRR strategy is most effective when done many times where the cash flow is so great that it compensates for the balloon loan.