BRRRR Strategy Deal Analysis: How to Recycle Capital and Boost Returns

Book: Real Estate by the Numbers | Authors: J Scott and Dave Meyer | Chapter: 47

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In the previous chapter, J walked through a real buy-and-hold rental he purchased in Fort Myers, Florida. He put in $38,164 of his own cash, did some renovations, rented the place out, and ended up with a property generating $2,135/year in cash flow and 12.6% total return when accounting for both cash flow and loan paydown.

Good deal. But this chapter asks: what if you didn’t leave all that equity sitting there?

This is the essence of BRRRR.

What Is BRRRR?

BRRRR is an acronym popularized by Brandon Turner and David Greene. It stands for:

• B: Buy a property that will significantly increase in value after renovation, with the potential for reasonable cash flow
• R: Rehab the property to maximize both rental income and post-renovation value
• R: Rent out the property on a long-term (or short-term) lease
• R: Refinance after the property is rented, typically six to twelve months after purchase, using a cash-out refinance based on the new appraised value
• R: Repeat the process with the cash you pulled out

The core idea is that when you force appreciation through renovation, you create equity. Normally in a buy-and-hold deal, that equity just sits in the property doing nothing. BRRRR says: pull some of that equity back out, keep the property, and use the cash to fund your next deal.

Done well, it lets you build a rental portfolio faster than saving for each property from scratch.

Two Reasons to Pull Out the Equity

The book gives two motivations for refinancing:

1. Boost your percentage returns. When you have a lot of equity in a property relative to its income, your money isn’t working as hard as it could be. Pulling some equity out and redeploying it elsewhere can improve return on equity (ROE). More on how this plays out in the numbers below.

2. Do more deals. If you can get a significant portion of your original investment back through a refinance, you can use that cash as a down payment on another property while still holding the first. This is how investors scale portfolios without needing to save up fresh capital between each deal.

The BRRRR Numbers: Same Property, After Refinance

This chapter continues directly from the Fort Myers example.

The property was purchased for $133,000, renovated for $15,000, and rented out. After renovations, J estimated the value at about $175,000.

Six months after purchase, he approached a lender for a cash-out refinance at 75% of the new appraised value. The appraisal came in at $178,500 (slightly higher than expected).

Refinance math:

After the refinance, J got $16,677 back in cash. His total out-of-pocket investment in the property dropped from $38,164 to $21,487.

He now has $16,000+ to put toward the next deal, and he still owns the rental.

The Trade-Off: Cash Flow Goes Down

Here’s the honest part that a lot of BRRRR enthusiasts gloss over.

Refinancing into a larger loan means a larger monthly payment. The new mortgage is $715.91/month ($8,591/year), up from $612.26/month ($7,347/year).

Updated cash flow analysis:

Cash flow dropped from $2,135 to $891. That’s a real decrease.

And the cash-on-cash return reflects this:

COC = Annual cash flow / Cash invested

COC = $891 / $21,487 = 4.1%

Down from 5.6%. On the pure cash-flow metric, the refinance made the deal worse.

But Look at the Total Return

Here’s where it gets interesting.

Because the new loan is larger, more of each payment goes toward interest early on. But the principal paydown is still meaningful. In Year 1, the new loan pays down $3,127 in principal.

EOC = Annual principal paydown / Cash invested

EOC = $3,127 / $21,487 = 14.6%

The equity-on-cash return more than doubled, from 7.0% to 14.6%.

Total return = ($891 + $3,127) / $21,487 = 18.7%

Before the refinance, total return was 12.6%. After the refinance, it jumped to 18.7%, even though cash flow fell.

The reason: while the cash generation went down, the cash still invested in the property went down even faster. The money is working harder on a per-dollar basis.

What Didn’t Change

The refinance didn’t affect depreciation. The building value is still $99,750 and the annual depreciation deduction is still $3,627.

The forced appreciation ROI from the renovation also doesn’t change. That $27,000 in equity creation already happened.

Important Caution: Don’t Overleverage

The authors are clear that BRRRR shouldn’t be used to squeeze every last dollar out of a property.

In this example, even after the refinance, the loan-to-value ratio stays at 75%. That’s the same LTV as the original loan. The value went up through renovation, so the dollar amount of debt went up, but the percentage didn’t.

Some investors try to refinance at 80% or 85% LTV to pull out even more cash. The authors say to be careful. Higher leverage means more risk if rents drop, vacancies increase, or values fall. Building a portfolio quickly by overleveraging is a recipe for problems.

Better to move a little slower and keep the numbers safe.

The Ideal BRRRR Deal

A few things need to be true for BRRRR to work well:

• The renovation needs to significantly increase the property’s appraised value
• After refinancing, the rental income must still comfortably cover the new (higher) mortgage plus all expenses
• You should be able to pull out a meaningful portion of your original cash without pushing LTV to dangerous levels

The authors acknowledge that getting 100% of your cash back out is possible but often doesn’t happen in practice. Even getting 50% to 70% back can be enough to repeat the process. The important thing is that you still own a cash-flowing property with reasonable leverage, and you have more capital to deploy than you would have without the refinance.

Comparing Before and After Refinance

The numbers tell the story. You earn less cash per year. But your money works harder because you have less of it tied up in this one property. And you have $16,000 in your pocket to go find the next deal.

That’s the BRRRR strategy in numbers.

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