BRRRR: Does a cash-out refinance increase the mortgage payment?

[Kyle Richey]

Hi, I'm new to real estate investing and I'm really enjoying the BP community!

The BRRRR method seems like a great choice for our goals, but even after watching the BP video on cash-out refinancing I'm confused about one thing:

Doesn't the cash-out refi increase the mortgage payment, which would decrease your cashflow?

I'm reading a lot about focusing on cashflow in Brandon's book, this blog, etc. and a lot of properties seem to only have $200/month or so in positive cashflow, so it seems like cashing out 80% of your equity could easily raise the mortgage payment to the point of eliminating the cashflow.

Am I missing something? Thanks!

[Andrew Varney]

Hey Kyle,

You're probably correct. The BRRRR method has some great advantages to it, but it might eat into your monthly cashflow in the short term. I think the best benefit of BRRRR is that you can control real estate for little to no money out of pocket. It's possible these deals cashflow, which is a huge bonus, but I think you get more benefit from the other pillars of RE wealth building: appreciation, mortgage paydown, and tax depreciation. If you could have $0 into a deal for a $300K home after refinancing out and it only 'cashflowed' $15 a month, but you had a modest 2% annual appreciation, had a standard 30 year amortized mortgage, and could depreciate your annual wealth creation would look like this:

Annual Cashflow: $180

Annual Principle Paydown (1st year): $4128

Annual Appreciation: $6000

Wealth Generation 1st year: $10,308

So you'd add $10,308 to your wealth on the first year - in addition to any equity you captured on the acquisition and rehab, which would only accelerate with compound interest on the appreciation and amortized schedule paydown, AND BEST OF ALL you'd have your cash out of the deal to do it again and add to your portfolio, accelerating your growth even faster.

If you listen to some of the more recent podcasts, David and Brandon have started talking about cashflow more as 'defensive' as it helps protect your investments and pay all of the monthly expenses to control the property and let it grow, but the real wealth generation is through appreciation, paydown, and rent increases over time while you control it.

Hope this helps and others may have other thoughts on the method!

Cheers,

ASV