When does the BRRRR start to pay off?

Question

Good evening all. Please forgive my ignorance. I've only just discovered Bigger Pockets and the brrrr strategy within the last couple of days. I don't even know if there's a search function. My question is this. When do these properties begin to make a noticeable pay off? Let's say you brrrr your way to five properties for example. If you're cash flowing $200 on each, there's a $1,000 that you're probably saving to bolster your emergency fund for these properties. Are you mostly only benefiting once these house are owned outright and you're banking nearly the full rent amounts?

Thanks in advance for any guidance you may have to offer.

Nicholas Lohr · Answer

Not quite. The real money in the BRRRR strategy happens in that third "R" the refinance. A successful BRRRR means that you got ALL the money you put in (the down payment, rehab costs, holding costs, etc) out of the deal when that refinance happens and then you own that property for free.  When that happens you're playing the house's money as they say and your returns are infinite.

BRRRR is more of a wealth builder rather than a cash cow at first because you can just keep doing it over and over and the next thing you know you own a bunch of properties for free with the tenants paying off your mortgages while you keep the buy more properties party going with that refi money each time.

Kenneth Garrett · Answer

@Steve Rich

Let me add on to what @Nicholas Lohr stated.  If you had five houses with ARV of $100,000 each and under the refinance portion you refi them at 75% you have just accumulated $125,000 of net worth and there is no money stuck in.  You then take advantage of interest deduction, property tax deduction, depreciation, possible appreciation and mortgage pay down of which your tenant is paying for.  Your total AGI on your taxes are reduced and you are much further ahead then just $200 a property.  For example if your deductions totaled $20,000 and it lowered your AGI by $4400 under the 22% tax bracket that means you just saved an additional $880 a property while putting cash in your pocket.

Anthony Dadlani · Answer

@Steve Rich

Agree with everyone that it’s a slow path to wealth creation but however slow and steady wins the race.

The value is the equity build up over time. Tenants paying down the mortgage and appreciation.  Cash flow will be not that large but slowly increasing with rental rates going up.

To cash out equity you can sell or refinance later again.

When doing this with multiple units and layering 10+ units over time , it’s a way to create rising monthly income along with long term wealth creation.

Best of luck in all your endeavors.

Kris Mann · Answer

@Steve Rich, here is a real example from one of my properties that I have readily available. Given the competition in the DC metro area, I am not able to buy low enough where I can pull all my money out during refinance as @Nick C. suggested. Regardless, this example shows the slow wealth building nature of BRRRR that everyone else referred to; I can either make $18k now, or take home $220k in 10 years. This analysis assumes fairly high operating costs, and doesn't even consider rental increases and savings from depreciation. So it is a fairly conservative estimate.

Purchase   Price

$255,000

Closing Costs (%)

2%

Total Acquisition Cost

$260,100

Rehab Costs

$28,200.00

Rehab + Rental duration

3 months

Interest Carry Costs

$3,540

Taxes/HOA/Utilities Carry   Costs

$2,220

After Repair Cost

$294,060

Appraised Value

$340,000

Initial Equity

$45,940

LTV

75%

Loan Amount

$255,000

Initial Investment

$39,060

Interest Rate

3.62%

Mortgage Duration (yrs)

25

Rent

$2,350

Monthly Operating Costs

$613

NOI

$1,737

Debt Service

$1,293

Cashflow (monthly)

$444

RENTAL ANALYSIS

10-year

5-year

3-year

Appreciation

$74,458

$35,387

$20,811

Sale Price

$414,458

$375,387

$360,811

Loan Balance

$179,408

$220,612

$235,118

Sales Costs

$26,940

$24,400

$23,453

Sales Proceeds

$208,110

$130,375

$102,240

Cashflow

$53,240

$26,620

$15,972

Total Return

$261,350

$156,995

$118,212

Minus Initial Investment

$39,060

NET Return

$222,290

$117,935

$79,152

FLIP ANALYSIS

Total Acquisition Cost

$260,100

Flip Rehab Costs

$28,200.00

Flip Rehab Duration (months)

2

Flip Marketing (months)

4

Flip Interest Carry Costs

$7,208

Flip Taxes/HOA/Utilities Carry Costs

$3,840

After Repair Value

$340,000

Flip After Repair Cost

$299,348

Flip Sales Costs (6.5%)

$22,100

Flip NET Return

$18,553

Nick C. · Answer

The first 2 responses here are very good. I'll just add the key to this strategy is getting a good deal on the front end. Too many people using this strategy nowadays are not buying good deals to begin with. This causes 3 things to happen: 1) when they refinance they are not able to cover their up front expenses and are already in the red. 2) their cash flow is minuscule at best, then property taxes, insurance, and unexpected repairs put them more in the red each year. 3) they're maxed out on LTV so IF a correction does come they lose all their equity.

Just like any real estate strategy, brrrr depends on buying good deals to work. In previous years this strategy worked better after lenders loosened up and there was still plenty of good deals to be bought. Today you can still get financing, but good deals are tough to come by.

Whitney Hutten · Answer

@Steve Rich I think others have addressed how you really are cashflowing.  The power of BRRRR, when done right, is to take the same pot of money and use it over and over again to build a portfolio.  You are creating value, and being rewarded for it.  Then you have to let time help you as you hold the properties and wait for appreciation and tenant paydown.

Steve Rich · Answer

@Nicholas Lohr

@Kenneth Garrett

@Anthony Dadlani

Thank you guys for your responses. This makes it a little more clear. I still have to some time to learn while I build some capital. In the meantime I'll read and watch everything I can.

Thanks again!

When does the BRRRR start to pay off?

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