The BRRRR Method/ Fundamental Problem with Refinancing

[David Kohli]

Hey Guys, 

I came across the BRRRR Strategy. It seemed very easy and clear at first but when I looked deeper into this concept, it appeared to me that it has some hidden problems. As long as I understood this method clearly, I think that the point where you make your money is with refinancing your deal. Let´s say you invested 245.000$ (200.000 for the property and 45.000 for the rehab) and the ARV of the property is 350.000$.You´ll get a refinancing loan of 262.500$ (0,75% of the ARV that was estimated by the appraiser).

Subtracting 245k from 262.5k, that´ll leave you with 17.500$ of "profit". 

My problem with that: It does not seem to be real profit as you have to pay it back to the bank. In the long term, you wont have those 17.500$ because you paid them back because after all, there still is a mortgage on that house. Even worse: You´ll probably have to pay interest of the loan (let us assume the interest rate is 2%, then you have to pay back 267.750€). So in the end, you lost 22.750?! (the presumed profit of 17.500$ plus the interest of the refinancing loan = 5.250$ -> 22.750$.)

The reason I left the rent out is because anyone calculating this is leaving it out too, even Brandon in his podcast. Did I get the strategy fundamentally wrong? Or is there something that I did not take into consideration? I would love to discuss this with someone that fully understood this. 

Thank You very much.

Best regards, 

David

[CJ M.]

@David Kohli

Hi David,

Just my two cents...yes, you do need to pay interest on the profit. That said if you left that money in equity, how much more cash flow does it give you per month? Probably not much. Now, if you took that $17K and reinvested it in another property, it could make you a lot more money...but more importantly, it could allow you to grow your business.

That said, before taking the full profit out, run your numbers carefully to make sure the property still cash flows enough to meet your goals.