BRRRR Method: Is the Decrease in Cashflow Worth it?

The methodology behind the BRRRR process is to purchase an investment that you predict will produce cash flow both before and after completion of the process. If done correctly, you should end up with a cash flowing property, all of your invested money back, and 20% to 30% in equity (depending on your financing terms).

But the question we are aiming to answer today is does a BRRRR decrease cash flow on my property? The answer is simple - yes, of course it does. Anytime you increase leverage (i.e. borrow money) the cost of that leverage is going to increase.

But I want you to consider if the BRRR method is still worth it for you and your investing strategy - if done correctly, it can enable diversification and business growth.

Before we start, here a couple of things to keep in mind:

- BRRR Method: Buy a home → Rehab the home → Rent the home → Refinance the home → Repeat the process by reinvesting into another home.

- While the ideal situation for a BRRRR is to do all the repairs upfront, that’s not always what makes sense for the market available or for your cash on hand.

- The cash pulled out from the BRRR process is not profit, but rather money that can be reinvested or used to pay yourself back. If the money is used for vacation or other non-investment purposes, the IRS considers that no different than a personal loan.

Option #1: No Loan BRRRR

This is the most common usage of a BRRRR, whether you paid for a home in all cash at the beginning of the deal or you have paid off your mortgage over time, the reality of the situation is the same; you balance owed on the home is $0.

Let’s dive into the details of the deal below and then talk through the key takeaway, the pros of the deal, and the cons of the deal.

Key Takeaway: over a 5 year window we will sacrifice a total of ~$17k in monthly cashflow but enable our business to use ~$75k more today to invest into more real estate.

Pros: 

- Reinvest cash-out from BRRRR: even if your next investment only has an S&P 500 return of 10% (7% minus inflation) - the increase in cashflow would exceed the current 'No Loan' cashflow.

- Tenants paying off the mortgage(s): using this money to reinvest into another deal gives you TWO tenants who are paying down mortgage(s), instead of just one. Assuming you buy a similar deal with the cash-out BRRRR funds, this enables you to double your equity per month.

- Tax benefits: if you choose to invest into another real estate deal, you can reduce your taxable income through depreciation, loan interest, etc. This means more money STAYS in your pocket.

- Decrease yearly tax bill: in many locations you can get a mortgage credit towards your net assessed value if you have a mortgage on the property.

- Net present value of money: the money you could use from the cash-out BRRRR is worth more today than it ever will be in the future, so find a deal and start increasing that cashflow.

Cons:

- Take on Debt: depending on your risk level, the worry of owing a bank money could far outweigh any potential benefit of making more money. 

- Decrease in cash flow: less money in your pocket every month (by ~$3.5k per year in this example)

- More work: a bigger portfolio isn't always the right answer for every investors situation and/or goals

Option #2: FHA Loan BRRRR

First time investors are often in this situation - they move out of their first home and decide to turn it into a rental. I was in the same situation with my first home and for the longest time I couldn't pull the trigger - at the end of the day, I was holding onto the fact that I would lose my awesome low rate of 2.75%. 

I think many people fall into this same train of thought, and it makes sense, that rate is basically giving you free money. However, after looking at the numbers, I was able to quickly see that inaction was killing me potential cashflow that I could be making with the cash-out BRRRR funds.

Let’s dive into the details of the deal below and then talk through the key takeaway, the pros of the deal, and the cons of the deal.

Key Takeaway: over a 5 year window we will sacrifice a total of ~$3k in monthly cashflow but enable our business to use ~$37.6k more today to invest into more real estate. 

Pros:

- No or low money needed for next deal: the biggest hurdle for potential real estate investors is often having the funds - this option allows you to get those funds for your next deal by slightly reducing monthly cashflow.

- Realize increase in home value: even if only minor updates were done to the house that you lived in for a couple of years, completing the BRRRR process here allows you to realize some of the increase market value of your home

- Reinvest cash-out from BRRRR: even if your next investment only has an S&P 500 return of 10% (7% minus inflation) - you could almost replace the total monthly cashflow you would be losing with the current 'FHA Loan' cashflow. 

- Tenants paying off the mortgage(s): using this money to reinvest into another deal gives you TWO tenants who are paying down mortgage(s), instead of just one. Assuming you buy a similar deal with the cash-out BRRRR funds, this enables you to double your equity per month.

- Tax benefits: if you choose to invest into another real estate deal, you can reduce your taxable income through depreciation, loan interest, etc. This means more money STAYS in your pocket.

- Net present value of money: the money you could use from the cash-out BRRRR is worth more today than it ever will be in the future, so find a deal and start increasing that cashflow.

Cons:

- Lose the FHA Loan Rate: as in my example, I had a great FHA rate locked in and lost it during this BRRRR process

- Take on more Debt: depending on your risk level, the worry of owing the bank more money at a higher rate could far outweigh any potential benefit of making more money

- Decrease in cash flow: less money in your pocket every month (by only $600 per year in this example)

- More work: a bigger portfolio isn't always the right answer for every investors situation and/or goals

Option #3: Non-FHA Loan BRRRR

The well-seasoned investors out there have seen this situation before. They have been investing for some time now and they have been fortunate enough to grow a large portfolio, but now they are unable to get another government sub-sized loan. 

This puts them into a situation where they might have to move to a commercial loan rate and terms to be able to pull their cash out of the property. Is it worth it?

Below is the scenario I was in for a fourplex that I own - unlike the two examples above, this one was less obvious. However, I had a deal lined up where I knew my cash on cash (COC) return was going to be ~35% in year 1, so it made sense for my situation.

Let’s dive into the details of the deal below and then talk through the key takeaway, the pros of the deal, and the cons of the deal.

Key Takeaway: over a 5 year window we will sacrifice a total of ~$19k in monthly cashflow but enable our business to use ~$23.4k more now to invest into more real estate.

Pros:

- No or low money needed for next deal: as I stated earlier, I had a deal lined up with ~35% COC return in year 1. This option allowed me to get those funds by slightly reducing monthly cashflow. 

- Realize increase in home value: for this deal we had completely renovated two out of four of these units, so by completing the BRRRR process, we were able to realize the increase value of those renovations as well as the increased market value.

- Reinvest cash-out from BRRRR: the next deal would need to be good for this strategy to make up for the ~$3k yearly decrease in cashflow. COC return in year 1 would have to be better than ~16% if you don't take into account any other benefits.

- Tax benefits: if you choose to invest into another real estate deal, you can reduce your taxable income through depreciation, loan interest, etc. This means more money STAYS in your pocket.

- Net present value of money: the money you could use from the cash-out BRRRR is worth more today than it ever will be in the future, so find a deal and start increasing that cashflow.

Cons:

- Take on more Debt: depending on your risk level, the worry of owing the bank more money at a higher rate could far outweigh any potential benefit of making more money

- Decrease in cash flow: less money in your pocket every month (by over $3k per year in this example)

- More work: a bigger portfolio isn't always the right answer for every investors situation and/or goals

Closing Thoughts

Often times people think a BRRRR can only occur by purchasing a property in cash, paying for all of the repairs immediately, and then refinancing it. The purpose of this article was to show a BRRRR can come in all shapes and sizes, and STILL help you.

Whether you're a first time investor or a veteran, I think these calculations can come in handy for making your decision on if you should BRRRR your property or not. 

Let us know if you have experienced other pros and cons from your own deal in the comments below!