IS CASH OUT REFI AS SWEET AS EVERYONE IS MAKING IT SOUND?! BRRR?

Question

So I have listened to tons of podcasts, youtube videos, google posts, and etc on the topic of BRRR investing.I completely understand the process (so I truly have been trying to figure this out on my own)

Buy Rehab Rent Refi Repeat. My only issues is with the REFI part. I keep hearing people say, you basically pull all of your money out of the deal and you're able to use that on another property. But the reality is, you're pulling your money out but you're taking on a much bigger loan than your house originally was purchased at. In order to only take 80% of that new loan you just signed for.

So in my situation I bought a duplex for $66,500 I put about $17,000 down and I owe about $47k (it's only been a year)

Comps have recently sold for $120,000 for the same size house in the area. (4BD 2Bath 1400 Sqft) mine is fully rented and rehabbed

So let's say I cash out refi for 80% that gives me about $47k - $3k for closing costs which would leave me around $44k in equity WHICH SOUNDS AMAZINGGGGG, but the problem is I don't now own that home because of the equity (because it's almost doubled in price) but instead I have a loan twice the size with an even higher interest rate. I'm not saying this method doesn't work I'm just wondering what I'm missing in the financial part because this doesn't sound fun and I was wondering if anyone else was wondering the same or if someone experienced in the process could clarify for me!! it would help me and others out a TON!!

Andrew Postell · Answer

@Asia Taylor the more equity you have in a property the more it will cash flow. So if you put down 50%, it will cash flow like crazy! The BRRRR method is not a "cash flow" strategy. I mean, you might make it that just depending on the scenario...but the BRRRR method is a "get all your cash out so you can go do it again strategy". So if you came out of pocket $0 every time you purchased a property....how many properties could you own? Unlimited right? Now, the counter here is - well, I need cash flow! So just leave more money in the property. But most of us have a harder time with cash than CASH FLOW. If your property cash flows $100 more per month...how long would it take you to save $20,000? FOREVER! And forever is too long. So while cash flow is important to most of us it's not as important as CASH itself.

I hope all of that makes sense but feel free to ask anything additional. Thanks!

I hope all of that makes sense but feel free to ask anything additional.  Thanks!

Account Closed · Answer

Where the majority of people fail at this is they underestimate the 5 year holding cap-ex and/or repairs.

Then “yay i did what Brandon does and am making almost $100 monthly!”

Turns into “my pm sent me a bill for $400 water heater repair, wth!”

And then that turns into “omg I have a vacancy what do I do,!”

And then that turns into “3 bed 2 bath turnkey property in ____ for sale. Perfect for out of state owner!”

Andrew Postell · Answer

@Asia Taylor yes, done it several times.  And you can see with the mentions above, so have others. For me personally, my job is my cash flow.  My job pays my bills, expenses, lifestyle, etc.  The real estate I have is for later, when I don't work.  That will be VERY later though.  Like 30 years.....which will work out great when I get those 30 year mortgages.  So if I can keep all of my money (or most) then I can just keep acquiring properties.  That's the plan anyways.

Whitney Hutten · Answer

@Asia Taylor My experience is similar to Kenneth's here (at 31 BRRRRs to date).  Just because you don't get all of your money out of each deal, doesn't mean it's a failure.  The point is the recycle your capital over and over again to get more equity build and cashflowing real estate. I have FAAAAARRRRR less of my own cash in all my BRRRRs combined than I in the 3 MLS/turnkey properties I have left.  And if you take care of the capex upfront, you use the forced equity on the home to pay for a long maintenance "free" window (which something always breaks...).

The BRRRR process does take work.  Between that and poor underwriting is where I see most investors get burned.

Joe Splitrock · Answer

@Asia Taylor there is lots of BRRRR gone bad stories. Two biggest trouble spots are:

1. Unable to refinance or unable to appraise at desired value.

2. Reducing cash flow to the point that you can't cover expenses.

When you take cash out, you are equity stripping. That reduces your cash flow, because you increased your debt service.

The advantage is you can deploy the cash to purchase more properties. It allows you to acquire more properties faster. That lets you use the power of time. Over time property values and rents increase, so if you can acquire more properties sooner, you can use the power of time to increase your investment.

Asia Taylor · Answer

@Brian Garrett I didn’t think of that angle. I really want to keep this duplex. My mortgage is $440 and my rent is $800 & $600 so I cash flow about $500 per month after all expenses. I will run these numbers in a higher loan though and see what makes most sense. Any regrets after you’ve gone through the process?

Brian Garrett · Answer

You have to run the numbers in advance and make sure it will still cash flow with the higher loan.

That's essential for BRRRR otherwise it's better suited as a flip in order to capture that equity gain.

Account Closed · Answer

I think Joe is the most sot on. I've not had any of the Brrrr people that have been willing to share their books/tax records n a property  so I could see waht really happened.  ki see BRRR need a private investor that is willing to shoulder the risk banks are not typically going to take that large of risk unless you have a lot of other property or collateral to back it up. I do use  a LOC for buy and rehab money and once it is rented for a while (6 to 12 months) they are more likely to give you more money but there again, higher money higher payments. Less equity you have typically give you higher interest rates. Thanks for the wisdom Joe. I go toe lots of meetups and typically after a speaker is finished I can talk to them alone and invariable their real story they reveal privately is not what was presented. I understand that everyone wants to look good but I believe we really want to help each other if we give the whole story - the glory and the OMG's we ran into. Is some of the stories above I heard holes that needed to be filled in.  One of my rules of thumb is high leverage is like walking on the edge of a cliff in earthquake country. This topic as well as many other topic's in real estate there are many ways to skin the cat but what happens along the way is the real story. I hear an old timer say that real estate is forgiving of a bad investment and I've seen that happen. the other thing that was passed along, if you bought a bad deal, ther is some one else out there that will still buy it from you and think it is a good deal ... you just never know.  Good luck on your journey and have an awesome day.

Colby Fryar · Answer

@Asia Taylor  David Greene refers to the strategy as the velocity of money.  You want to be able to refi out of your properties so that you can recycle your cash and keep the process going again and again as  @Whitney Hutten stated above.  The idea is to buy as many assets as possible using the same or minimal cash so that you increase your wealth.  And yes, you need to make sure the property cash flows once you refi.  Keep in mind that you do not have to take all the cash out. Banks will typically not discourage you from taking a lower LTV so that your rent covers your mortgage and other expenses.

Kenneth Garrett · Answer

@Asia Taylor

I have completed a number of BRRRR projects.  I have not always cashed out at 100% and I have not always taken additional money out.  It depends on the project.  The numbers have to make sense.  You are buying them at a discount first.  I did a simple BRRRR when I started.  Private loan $85,000,5 rehab 15,000 (I paid for the rehab), put a renter in it and refinanced it.  I was able to pull all my money out and my private investors, but no additional funds.  I have my funds back and bought another one.  I just kept going.  Ended up buying between 20-25 with this method.  Sometimes I paid for the rehab, other times the private investor paid 100% of both purchase and rehab.  Some I flipped, but most were rentals.  Some I left some money in which required me to bring cash to the table, but I always pay back my investor first.  The return on my money was generally 50%.  In other words, through the cash flow I was able to reimburse my money out within 24 months.

IS CASH OUT REFI AS SWEET AS EVERYONE IS MAKING IT SOUND?! BRRR?

Most Popular Reply