What do you think about real estate investing BRRRR method (Buy, Rehab, Rent, Refinance, Repeat)? Is it a good idea for me to refinance my primary residence and cashing out to buy a property to fix up and rent out? Or is it still better to stick with investing in the target index fund?
Husband’s income: $250,000, debt: 500,000 mortgage, net-worth: $1,000,000. career: stay at home mom of 5 children, full time MBA student, husband: physician.
Hey @motherrunnercyn!
First, congrats on being a millionaire! And having five kids, dang!!!
Well, there’s only two things I invest in and that I would suggest investing in: 1. Index funds and 2. Investment real estate. So you’re on the right path!
I’m a fan of Bigger Pockets and the BRRRR method seems awesome, although admittedly in my own investment real estate experience I’ve never done it quite like that. (The numbers are just too ugly in socal to buy and hold long term rentals at current prices, in my opinion).
Real estate is a lot of work… it’s starting a business. A business at which you need to learn a ton and acquire a lot of experience. Being that you’re already millionaires, I think further mortgaging your primary home to throw at further leverage in a brand new business seems like a risk and stress you don’t need in your life.
Let’s say the bad thing happens: You refinance, pull a lot more money out, then buy a rental on a loan. Then the real estate market crashes… you could find losing all of the equity (and then some) in both of your properties… it could even drain the rest of your net worth. You might find yourself in a situation where you have to write a check to sell the rental… or dump your whole income into two monster mortgages that aren’t bringing in nearly enough to cover the expenses. Being “over leveraged” is how people go broke.
So, from the limited info I have on your situation, I’d say skip the “refinance your home” step, just save a little longer and look for the right first deal! 
I’m not as hardline as Dave Ramsey on this. If I were buying rentals, I’d probably put 30-40% down. Enough where you’re not going to go bankrupt if the bad thing happens, but also using some leverage from the bank to increase future returns.
Yeah, I probably wouldn’t buy a long term rental in Davis either. Unless you find a really screaming deal. I don’t own any in San Diego for the same reason. The math is just too bad. This isn’t really my area of expertise… I struggle with the question myself, but some ideas:
- Seek nearby areas where the math is more favorable. I’d probably be looking in Sacramento if I were you.
- Out of state managed properties. I have a friend who owns a bunch of properties in Florida that he’s never even seen. A company there seeks investors, they buy and manage, and send the profits back. This would require a lot of due diligence.
- Syndicated deals. I have money in a few “real estate syndication” deals. This is basically where a group is raising a big amount of money… like many millions to go buy a big apartment complex or shopping center. They manage the whole deal, send profits back to the investors. Often the returns can be good, but there may be high fees, risk of poor returns, or worse, risk of fraudulent activity and losing your principle. It also makes your taxes more complicated because you get K1s which are often slow to arrive.
Or you can just skip real estate all together. Making your good income, paying off your home, dumping everything into a target date index fund would be a very easy, simple, low stress and nearly financially optimal route to take. There’s nothing wrong with simple.
Hmm… so, I’m a mediocre real estate guy at best. So I’d probably seek out more experienced advice. BUT SINCE YOU ASKED:
I would prioritize finding something that is cash flow positive. That is, after all the bills and mortgage is paid, you still have cash surplus each month. If you’re throwing your income at a rental property just to keep the mortgage paid, that’s not good.
I think rehabbing is a whole nother can of worms. You might try to find a place that is pretty decent, and some simple cosmetic stuff (paint, carpet, etc) could make it a solid rental. Save the full gut remodel for another challenge?
Experience is really valuable. Seek out those who have done it in your area, and buy them a cup of coffee and ask them everything you can!
Those were really good questions. I’m not there yet but always love learning about future possibilities.