Recently, a question came in from a BiggerPockets Podcast listener asking, “I’m still unclear how the BRRRR strategy would work, given that every property increases your debt load. Why would anyone keep giving you new loans as your debt balance keeps building?”
Forget the BRRRR part for a second. Let’s just talk in general. The underlying logic is: the more properties you own just adds more and more debt to your life. Why would banks keep giving you loans?
How Loans Work for Real Estate Investors
Well, let’s talk about that. First of all, some banks will stop you after four or after 10. There are limits. They were six for a while, then it was 10. Those are residential, single-family house loans. You typically can only have 10 of them, roughly.
Now, does that mean you can’t invest in more than that? Of course not. You can still find ways to do it. You can go portfolio loans, you can go private loans, blah blah blah.
However, the real core of the question besides the technical, what we’re getting at here is this: By buying more and more real estate, isn’t that just adding more and more debt to your life? Isn’t that getting dangerous?
Well, not if every property makes you way more money than it costs you. I have a friend who owns a Domino’s Pizza. So they have a loan on their building. Their building costs them $2,000 or $3,000 a month they have to pay. And they have employees. That costs tens of thousands of dollars every month for employees.
But their business brings in around $50,000 a month in income and revenue. Guess what? They don’t own one Domino’s—they own 30 Domino’s. And they can keep buying Domino’s because every restaurant just makes them way more money than what they spend.
That said, the bank doesn’t go, “Nope, too many loans!”
No, they’re like, “Great, we’ll give you another one.”
The banks are begging them to buy more Domino’s. Why? Because they’re buying businesses.
That’s what rental properties are. They’re little businesses that produce extra money, profit, cash flow—that is, if you buy them right.
So, if you have a bunch of properties and you buy them all right, you just make more and more money. The bank thinks, “Oh, yeah, I like this person.”
Keep reading the article here:
Subscribe to the BiggerPockets Channel for the best real estate investing education online!
Become a member of the BiggerPockets community of real estate investors – https://www.biggerpockets.com