Introducing BRRRLOC. The BRRRR strategy, but with Lines of Credit

Everybody is talking about the BRRRR strategy. Buy a place, Rehab it, Rent it out, Refinance, and Repeat. It’s a great way to get started in real estate. It helps the investor start small. It’s cozy and comfortable. It’s understandable. But it has some flaws.

Flaws with BRRRR

  1. Refinancing is slow. The investor goes through an entire new loan process. This new loan has to go through underwriting again and usually the bank will want the property to be seasoned (show that it’s making money) first. This can be up to 2 years. Deals are lost in the time it takes to pull this money out.
  2. Refinancing is costly. Look to pay 1% in closing costs to take out a new mortgage. Occasionally, the investor will have a prepayment penalty when paying off the previous mortgage as well.
  3. Interest payments. Once the refinance is done, the investor gets a lump of cash in their bank account (yea!). Except, they have to pay interest on it right away. They continue to pay interest while they are searching for that new deal.
  4. Locked in rate. That wasn’t a problem before 2022, when rates started going up. Those who locked in were dancing in the streets. Today, if the interest rates go down, the investor will be tempted to finance a third time, with all the costs associated with it.
  5. Once you refinance, you wipe out most of the equity and cash flow you have made in the place. For instance, you increase the value by $100,000 and take out a new mortgage. Since you just bought it, you won’t be able to take out the money you just put in because the bank wants you to have a certain amount of equity remaining (typically 20% of the value). You increased the value, though, so you can take out all but 20% of the increased 100k. You get 80k to buy the next property, but you only have a meager 20k in equity increase in the property. Now, the monthly mortgage will be higher and any rent bump you achieved goes to repayment.

Some might ask, “But these things aren’t that bad because I have a residential loan, so why should I care?” Keep in mind that you are probably in violation of the terms of your mortgage if you said you would live there but are renting it out. You can probably get away with this for your first property, but it’s not sustainable. Treat your business like a business and you won’t have to redo everything when you actually get serious.

Welcome to the BRRRLOC

  1. Buy the place
  2. Rehab it
  3. Rent it out
  4. Receive a Line of Credit on it

Only 4 steps, it’s that easy.

Here’s the reasons why you should do the BRRRLOC

  1. The LOC is cheap. Go to the bank that has your primary mortgage. This is critical because no other bank will want to have a second lien on your property. Your first bank will, because they already have first lien. If you default they can go after the property anyway. Pay for an appraisal (you would anyway with a refinance) and a yearly maintenance fee of a couple hundred bucks. The LOC is now open for your use.
  2. The LOC hangs around, ready to go to work. You now have the huge benefit of being able to take your time searching for the next great property. You don’t have interest payments hanging over your head every month.
  3. The LOC isn’t amortized. You don’t have monthly payments with a LOC. You can pay interest only if you want or pay down principal if you want.
  4. Like a refinance, you will remove equity and cash flow, but you can choose when and how much with a LOC. Take out only what you need and leave the rest.

BRRRLOC requires a more savvy investor than BRRRR. High Performers only. Just remember the #1 rule of the BRRRLOC that you must never violate: The new property you purchase must be able to pay off the LOC. Think of this like the new property just took out a loan from the bank that is the first property. Never expect the cash flow of the first property to cover the LOC being used for the new one. This is a critical error and can tank both properties.

Want more detail on LOC vs refinance? Take a look here.

Dr. Equity