Does BRRRR ruin cash flow?

Question

Hi guys!

If anyone can help clarify this for me, I would greatly appreciate it!! When you BRRRR a property, would your cash flow go down and potentially go away?

My husband and I have a rental that is cash flowing $525/month and I’m thinking that if we refinance to pull equity out (we rehabbed it prior to renting it out), wouldn’t the mortgage payment go up and therefore we would lose part or all of our cash flow? If the answer to that is yes, what is the financial benefit of pulling the equity out only to lose cash flow? I get that it could help fund the next investment however are there any limitations on the numbers to ensure this doesn’t make a great deal bad just so you can buy another property?

What am I missing? I would appreciate any insight!!

Thanks so much!

Monica

Lien Vuong · Answer

Yes you are depleting that cash flow but the idea if that you can leverage those funds elsewhere in a larger full sum rather than the accumulation of $500/month. Taking the equity out of it would give you purchasing power to reinvest it in another property which yields more cash flow and appreciation.

Mike Dymski · Answer

Many BRRRR investors don't care if cash flow is lean post-refinance.  They have no original capital left in the property and are using the refinance proceeds to generate 20%+ returns on the next one vs 5% in the existing property (the interest rate on the loan).  Just need to maintain adequate reserves.

Mark Fries · Answer

@Monica Evans

Dont refinance...your assumption is correct.

Son D. · Answer

@Monica Evans You're right in that if you do cash out refinance you've increased your debt thus reducing your cashflow. However, you can use this cash out as a down payment for your next cash flowing property. Try to do this so that the cashflow of 2 properties are at least the same as the 1 property before you refinanced, if not more. People use this as a strategy to scale and build their net worth. Make sure that you are comfortable with the amount of debt that you will have from owning these 2 properties. Remember though that even with more debt, as long as your properties cashflow, you now have 2 tenants paying off your debt.

Russell Brazil · Answer

Yes you are correct, the more you leverage  property the lower your net cash flow will be.

Also, often overlooked, when many people go to sell a property years down the line, and have used it as a piggy bank for years, they often end up in the negative afyer paying their capital gains and depreciation recapture, because the actual gains have been spent before from the cash out refis.

Patrick Britton · Answer

@Monica Evans  I would calculate the expected net income you'd receive if you could deploy those newly accessible funds from a refinance and ascertain if that amount, whatever it is, is worth the increased expense brought about by the refinance.  I would always look at your total portfolio as a whole, not individual pieces.  And presumably, how do all those changes affect your capital reserve?  Only you can determine if a refinance and redeployment of funds is "worth it."

To use a real life and personal example, the refinance and redeployment of funds into other rentals created a net benefit of $490/month, which was an increase of roughly 10% in my total monthly net income from rentals.  Yes, it also strained by capital reserve but fortunately it's still substantial.  So for me, in that particular situation, it made sense.

Anthony Dadlani · Answer

Yes, Taking any loan out on a property will reduce your cash flow has you have to pay it back. However the theory is that you can redeploy that capital into another project and improve the cash flow beyond the rate of interest.

Best of luck in all your endeavors.

Son D. · Answer

@Asa Ifill your question is confusing me a bit. If you're using the BRRR method then I would think you'd get a lot more out than just enough to put down on the next property since you poured a ton of money into both the buy and rehab phase.

Or are you referring to a situation in which the deal was so good that not only you pulled out everything you put in but get about 50k over that so you can put in the next deal?

Asa Ifill · Answer

@Son D.

I’m a newly REI and I’ve been listening to the audiobook of the BRRRR method and thought this was the best investment idea yet! Your question has lead me astray because the comments were saying this method actually loses cash flow and tends to put you in lots of debt at the end of the day if you don’t have tenants paying down your refinance mortgage.

Asking a question for me: Cant you BRRRR the first property and get a good refinance out of it ($50k) and use that for another property and refinance that with a 30yr loan and have 2 cash flows now, but also have tenants paying down your 30 year mortgages?

The BRRRR method seems to be great when you have tenants consistently.

Criticism please!!

Asa Ifill · Answer

@Lien Vuong

I’m a newly REI and I’ve been listening to the audiobook of the BRRRR method and thought this was the best investment idea yet! Your question has lead me astray because the comments were saying this method actually loses cash flow and tends to put you in lots of debt at the end of the day if you don’t have tenants paying down your refinance mortgage.

Asking a question for me: Cant you BRRRR the first property and get a good refinance out of it ($50k) and use that for another property and refinance that with a 30yr loan and have 2 cash flows now, but also have tenants paying down your 30 year mortgages?

The BRRRR method seems to be great when you have tenants consistently.

Criticism please!!

Does BRRRR ruin cash flow?

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