In order to begin compounding both Net Worth, and NMC, we can use some or all of the aforementioned leftover leverage proceeds to make a principal payment on our oldest mortgage. The way that we start really compounding is by starting another stream of properties to go with the one we have already established. When we talk about compounding, we mean exponential growth-not linear. Compounding gains are measured in orders of magnitude (10x, 20x, 100x). Linear growth gains are measured in percentages (20%, 40%, 100%). When we start with the BRRRR method and add leverage, we get compounding.īRRRR is linear growth, which is good, but nowhere near as good as compounding. This strategy or process is commonly referred to as the Buy, Renovate, Rent, Refinance, Repeat method or “BRRRR” method. Sound’s like the BRRRR investing strategy… The BRRRR investing strategy One finishes, then the next starts, when that one finishes, the next starts, and so on. Each successful deal in the stream pays for the next deal in the same stream-growing our income, net worth, and net monthly income with each completed deal. So, we have created an infinite stream of properties that will continuously grow our NMC and NW forever… Just keep repeating the process. Once there is a tenant is in place on our property, we have created a stream of income that will continue to finance the next deal indefinitely. We can use it to pay for living expenses, go on a vacation, buy a luxury, or reinvest it.
This leftover cash is basically our profit (though it is technically loan proceeds). However, if we do our proper due diligence the way Jay outlines in his course, then we will be only interested in those properties that will provide a positive NMC after they are leveraged.Īlso, when we analyze the After Repair Value (ARV) during our due diligence, we only pursue properties of which the leverage proceeds will be well above what it costs to buy/renovate/solve the issue of the next investment. This leverage will reduce the NMC of the property by the mortgage payment amount until the loan is paid in full. This loan is actually repaid by our tenant in the form of monthly rental payments.
It is tax free because it not income, capital gains, or profit-it is a loan. Notice that the 80% of the appraised value is similar to the average amount pocketed by the flipper. A few banks will lend up to 90% of the total appraised value in a cash-out refinance, but almost all of them will loan 80%. Our leverage, in this case, is a cash-out refinance (or a home equity loan).