The five steps

  1. Buy a property that needs work, often with short-term financing.
  2. Rehab it so it is worth more.
  3. Rent it to a tenant.
  4. Refinance into a long-term loan based on the new, higher value (the after-repair value, or ARV).
  5. Repeat with the cash that came back.

The refinance is the key step. A lender sizes the new loan from the ARV, not from what you paid. If you bought low and added value, the new loan can repay the old one and return some of your cash.

The math that matters

Cash in = purchase + closing + rehab + loan costs + holding costs - acquisition loan Cash out = new loan - old loan - refinance closing costs Cash left in the deal = cash in - cash out

If cash out is as big as cash in, you got all your money back. Anything less is cash you still have tied up.

Worked example

Made-up round numbers. Buy for $200,000. Rehab $40,000. ARV $300,000. Six months of holding. Hard-money loan on 80% of the price and 100% of the rehab at 11% with 2 points. Closing 3% of price. Refinance at 75% of ARV, 7%, 30 years, 3% closing. Rent $2,400 a month. Other inputs: vacancy 5%, repairs and CapEx 5% of rent each, property tax 1.2% of value, insurance $1,500 a year, $250 a month of insurance while you hold, no management and no utilities.

  • Acquisition loan: $160,000 + $40,000 = $200,000.
  • Total cost, including closing, loan points and six months of holding: $263,700.
  • Cash in: $263,700 - $200,000 = $63,700.
  • New loan: 75% of $300,000 = $225,000.
  • Cash out after paying off the old loan and refinance costs: $225,000 - $200,000 - $6,750 = $18,250.
  • Cash left in the deal: $63,700 - $18,250 = $45,450.
  • Cash flow after the new loan: about $1,417 a year.
  • DSCR at these inputs: 1.08. A lender that needs 1.20 would cap the refinance near $202,000, below the $225,000 above.

So this deal returns about 29% of the cash put in. It does not return all of it. That is common.

What if the appraisal comes in low?

Same deal, but the appraisal says $270,000 instead of $300,000.

  • New loan: 75% of $270,000 = $202,500.
  • After refinance costs of $6,075, the loan is $3,575 short of paying off the old loan. You must bring that cash.
  • Cash left in the deal rises to about $67,275.
  • Cash flow after the new loan is about $3,573 a year. It is higher because the loan is smaller, but you have far more cash tied up.

A $30,000 drop in value cost you about $21,800 of cash back. This is the main risk of the method.

What to check before you buy

  • Know your ARV from recent sales of similar homes, and be a little cautious with it.
  • Price the rehab with a contractor, and add a cushion for surprises.
  • Ask your lender how soon after the rehab you can refinance. Some lenders ask you to wait before they will lend on the new value.
  • Check that the rent supports the new loan. The lender will test it. See the calculator for the loan your rent can carry.
  • Plan for the case where cash is left in the deal, and ask if you are happy with that return.

If any of these is shaky, the deal gets riskier. A deal that works only when every guess comes true is a weak deal.

Where it goes wrong

  • The ARV is an estimate. If the appraisal comes in lower, the refinance pays out less.
  • Repairs often cost more or take longer than planned. Holding costs grow each month.
  • Lenders set a minimum debt service coverage. A refinance can be smaller than you hoped. See What is DSCR? Debt service coverage explained.
  • Rates and loan rules change. Check current terms with a lender.
  • Pulling cash out raises your loan, which lowers monthly cash flow.

Is it right for you?

BRRRR suits people who can manage a rehab and keep costs in check. It fits poorly when prices are high and few homes are cheap enough to add value to. Run the numbers before you buy, not after. Use The 70% rule and max allowable offer to set the most you can pay.

Try the BRRRR calculator to test your own numbers.

FAQ

Do I have to get all my money back?

No. Many deals leave some cash in. What matters is whether the cash left in still earns a return you are happy with.

What is ARV?

After-repair value. It is what the property should be worth once the work is done. It is usually estimated from similar sold homes.

How does the 70% rule connect?

It is a quick way to set the most you can pay.

Why does the refinance often pay out less than expected?

The loan is a percent of the appraised value. A low appraisal or a lender coverage test can shrink it.