All Forum Posts by: Steve K.

@Turo Tales

BRRRR is a buy and hold landlord strategy. It merely adds a remodeling component. Check out podcasts.....several on BRRRR, including one where the BiggerPockets author speaks about his book on BRRRRR

@Matt Hazlett,

Matt,

I've changed my thinking on debt over the last 38 yrs of marriage. My first home had a 12.25% APR loan and it was easy to see that a goal of paying off the mortgage early was similar to expected mutual fund yields.

Today, as a REI, I look at it differently. My investments are making 20% cash on cash return with leverage. I have one mortgage at 2.625% APR.....why would I pay that off, when my capital could earn 20% elsewhere? Admittedly, I'm spoiled in Denver, where we've been getting 8 to 10% annual appreciation. (i.e. if 8% appreciation, and 25% down payment, my down payment is earning 32% annual yield in the short term. Leverage is helping me grow wealth faster).

I'd encourage you to see that if a rental with minimum down payment can earn 15 to 20% yield, and if the mortgage is 4.5% APR on that rental, then any extra equity that reduces the loan is earning you exactly 4.5% yield. If you've held your rentals for several years, is there a way to extract some of your equity, and grow your rental fleet?

I know a widow in Denver that 7 years ago paid $250k cash for a duplex. She loves the cashflow (no mortgage payment), and she's debt-averse. She's made good appreciation. Likely doubled value in 7 years. Her duplex is now worth $500k. But think about what she could have done putting $62,500 down payment on 4 similar duplexes. She could have had $250k down payment on $1million in real estate. When it doubled in 7 years, she could have gained $1M instead of 25% of that (with the 75% LTV leverage.

BRRRR is a clever way to grow wealth quickly, using max leverage. Decide for yourself what level of debt you're comfortable with.

@Justin Mitchell,

If you put $15k down, and have a successful rental, aren't you generating 15% cash on cash return (or similar)?

If the APR of the mortgage is around 4.5%, the "extra" $30,000 of down payment in the conventional loan is "earning" you exactly 4.5% yield. I'd ask "why not put all of your $45k to work at 15%, instead of putting so much of it to work at 4.5%.

In good times, you'll create wealth faster using the higher leverage/loan. In other words, try for 3 properties with $15k down each.

Of course, if we hit a recession, the extra debt load may be a problem. Decide how much debt you're comfortable with.

@Justin Mitchell

....are you saying merely that you're cash on cash return is higher, because you put in a smaller down payment with the FHA?

That's not surprising. The more leverage you use, you'll on paper have higher cash on cash return on the equity invested......higher debt isn't for everyone, but many REI's employ higher leverage. Have you read about BRRRRR ?

@Phil Rizzo

....I recently listened to this podcast on BRRRRR

https://www.biggerpockets.com/blog/biggerpockets-podcast-237-partnerships-brrrr-investing-working-full-time-ian-reeves

wherein, the invester in Kansas City suburbs was buying and rehabbing for $41k and ARV was $70k (about 59% of ARV) so, yes, BRRRR can work in other markets. He also says that house rents for $975/mo .....which makes his BRRRR even better on the monthly cash flow side as well.

good luck

@Phil Rizzo

Because the banks will lend 75% LTV after the remodel, anytime you can buy and rehab for less than 75% of the ARV, you'll have the ideal BRRRR.....and have a chance to extract your full cash invested, to repeat into the next property.

In Denver, the competition for fix/flips is so intense, it's hard to buy and rehab for less than 85% of ARV. Thus, I can't fully BRRRR and get my money out in this market. I'd have to leave about 10% cash in the property.....still a nice investment, but can't grow wealth as quickly as with a full BRRRRR

Beware that the new bank may require 6 months of "seasoning" before they'll let you do a "cash-out" refinance.

@Phil Rizzo

Unless your banker has a different requirement from those used by BRRRR investors, I think you're ok.

If you can find and rehab a property for $100k that will appraise for $150k, you'll have a "home run" of a BRRRR. That's hard to find.

BRRRR is to access all or part of that $50k gain, then "repeat".

Once it appraises for $150k, the banks will loan you 75% or 80% of value (LTV).....so, your banker is telling you they'll loan up to $120k loan (80%LTV). You will have 30% equity or down payment minimum in the property. In the BRRRR method, this is ideally part of the "gain" you've made....but it is "equity" to satisfy the bank, nonetheless. You shouldn't be asked to put in another/new $30,000 too.

@Turo Tales

Curious: if you want to grow a passive real estate portfolio, why'd you sell rental #1? What made this a "bad" investment going forward? Why not "add" to it, instead of replacing?

Yes, you free'd up $150k in cash....but you just suffered transaction costs, and created a taxable gain. (each could have been deferred if rental #1 is a decent long-term hold)

Have you read about the BRRRR strategy? If you can accomplish some remodeling while serving in the military, It's one of the fastest ways to grow wealth...because you use a lot of leverage.

@Jake Rhodes

my BRRRR's have had a "6 month seasoning" requirement before a new bank would do the "cash-out" refi

@Brad Wayne

....looking for under-valued properties with extra vacant land can be a good strategy in and of itself, if there's a market to build on the vacant land. You seem to have found one.