BRRRR Math Walkthrough
BRRRR Math Walkthrough
The BRRRR acronym (Buy, Rehab, Rent, Refinance, Repeat) describes the cycle, but the numbers explain whether the deal is worth doing. This walkthrough covers a realistic scenario from purchase through cash extraction.
Key takeaways
- A complete BRRRR deal timeline spans 9-15 months from purchase to refi close.
- Your initial cash outlay (down payment plus rehab capital) determines how much you tie up before cash extraction.
- The refinance loan-to-value (LTV) at 70-75% determines how much cash you can pull out.
- Cash-on-cash return is the annual return on your initial cash investment, which is where the BRRRR leverage shines.
- A realistic goal is 15-30% annual cash-on-cash return on your initial capital, assuming the property stabilizes.
The baseline deal scenario
Let us walk through a mid-market single-family property in a secondary city (Austin, Texas area, circa 2023):
Property details:
- Address: 3-bedroom, 1.5-bath single-family home in suburban neighborhood.
- Current condition: tenant-occupied but neglected; dated kitchen, bathroom, flooring; mechanicals serviceable.
- Purchase price: $180,000.
- After-repair value (ARV) estimate: $240,000 based on 3 comparable sales in the neighborhood.
Stage 1: Buy (Months 0–1)
Purchase price: $180,000 Down payment (20%): $36,000 Closing costs (title, survey, inspection, underwriting): $2,500 Hard money origination fee (2%): $3,600 Total cash to acquire: $42,100
Your cash invested so far: $42,100. Your loan balance: $180,000 + $3,600 origination = $183,600.
Stage 2: Rehab (Months 1–4)
You have identified needed repairs:
- Kitchen: $12,000 (counters, cabinets, appliances)
- Bathroom: $8,000 (fixtures, tile, vanity)
- Flooring: $7,000 (vinyl plank throughout main living areas)
- Paint and drywall: $4,000
- Roof inspection and minor repairs: $2,000
- HVAC service and filter replacement: $1,000
Total rehab budget: $34,000 Your rehab contractor is paid as work is completed: $8,000 month 1, $10,000 month 2, $8,000 month 3, $8,000 month 4.
The hard money lender holds back 10% ($3,400) in a reserve account, released 30 days after final inspection.
Your cash outlay during rehab: $34,000 (on top of the $42,100 already spent).
Total cash invested to date: $42,100 + $34,000 = $76,100.
Stage 3: Carrying costs during rehab and stabilization (Months 1–6)
While the property is being rehabbed (4 months) and after (2 more months before stabilization), you carry costs:
- Property taxes: $150/month × 6 = $900
- Insurance: $80/month × 6 = $480
- Hard money interest: $183,600 × 10% ÷ 12 = $1,530/month × 6 = $9,180
- Utilities (to maintain property): $100/month × 6 = $600
Total carrying costs (6 months): $900 + $480 + $9,180 + $600 = $11,160.
Your total cash invested to date: $76,100 + $11,160 = $87,260.
(Note: If rehab takes 4 months and stabilization takes 2 additional months, you have 4 months of carrying costs during active rehab and 2 months where the property is stabilizing with a new tenant in place. We are averaging 6 months for simplicity.)
Stage 4: Lease and stabilization (Months 4–10)
By month 4, rehab is complete. You immediately list the property and have a tenant sign a lease by month 4 (concurrent with final rehab weeks). The tenant moves in during month 5. Now rent is flowing.
Rent: $1,400/month **Month 5-6 carrying costs (taxes, insurance, hard money interest, utilities): $1,530 + $150 + $80 + $100 = $1,860/month
In months 5-6, the property generates $1,400/month but costs $1,860/month, so you are still out $460/month. But this is only 2 months, so the loss is $920. By month 6, seasoning requirements are approaching (most lenders accept 6 months). You have already invested $87,260 + $920 = $88,180.
Stage 5: Refinance (Months 6–9)
By month 6, occupancy is documented. You contact a refi lender and order an appraisal. The appraiser inspects in week 2 of month 6 and issues a report valuing the property at $242,000 (close to your ARV estimate).
Appraised value: $242,000 Refinance LTV: 72% New loan amount: $242,000 × 0.72 = $174,240
Payoff of hard money loan:
- Original hard money balance: $183,600
- Interest accrued (approximately 6.5 months at 10% = $99,440 ÷ 12 × 6.5): $9,954
- Rehab holdback (10% released after refi): $3,400
- Total payoff due: $183,600 + $9,954 = $193,554
New loan amount: $174,240 Shortfall: $174,240 − $193,554 = −$19,314
Uh-oh. The refi loan amount does not cover the hard money payoff. This happens. Solutions:
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Accept a higher LTV (lender may approve 75% instead of 72%):
- New loan at 75%: $242,000 × 0.75 = $181,500. Shortfall is now $12,054. Still short.
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Increase the appraised value through an ROV (reconsideration of value).
- If the appraiser will increase the value to $260,000, the refi at 75% = $195,000. Payoff of $193,554 leaves $1,446 cash out, before costs.
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Bring cash to closing.
- You can use reserves to cover the shortfall and close the deal. This is uncommon in ideal BRRRR scenarios but happens in constrained markets.
Let us assume the appraiser agrees to an ROV and adjusts the value to $252,000. At 73% LTV (a middle ground), the new loan is:
Appraised value (adjusted): $252,000 New loan at 73% LTV: $252,000 × 0.73 = $183,960
Payoff of hard money: $193,554 Shortfall: $183,960 − $193,554 = −$9,594
Still short. You negotiate with the hard money lender: I will pay the $9,594 difference in cash at refi closing, and in exchange, you release the rehab holdback early ($3,400). Net, you pay $9,594 − $3,400 = $6,194 out of pocket.
Alternatively, the hard money lender agrees to accept a partial payoff of $183,960 and carry a $9,594 second mortgage (rare, but possible if you have a relationship).
For simplicity, let us assume you bring $6,194 to closing. You now have a new conventional loan for $183,960 at 6.5% for 30 years (a realistic rate in 2023).
Refi costs (appraisal $500, underwriting $750, title insurance $400, origination 1% = $1,840): $3,490
Cash out at closing: $0 (you had to bring $6,194 to cover the payoff difference, minus the refi costs $3,490 = net $2,704 brought to closing).
Your total cash invested is now: $88,180 + $2,704 = $90,884.
Stage 6: Post-refi cash flow (Months 10+)
After refi closing, the hard money loan is gone. You now have a 30-year conventional mortgage at $183,960.
New monthly mortgage payment (at 6.5% over 30 years): $1,193 PITI (principal, interest, taxes, insurance).
Tenant rent: $1,400/month Property taxes (monthly): $150 Insurance (monthly): $80 Maintenance reserve (estimated 1% of property value annually): $252/month Property manager (if used, 10% of rent): $140/month
Total monthly expenses: $150 + $80 + $252 + $140 = $622 (excluding the mortgage)
Net cash flow per month: $1,400 − $1,193 − $622 = −$415
Wait, this does not look good. The property is cash-flow negative. This is not unusual in BRRRR deals, especially in the early post-refi phase. The issue is that the hard money loan's 10% interest was artificially high; when you refi to conventional 6.5%, the payment is lower, but the loan amount is still large (you did not put much equity down).
Let us reconsider: the problem is that you put down 20% on the purchase ($36K) plus rehab and carrying costs ($45K) = $81K total, but you only pulled back roughly $0 in cash at the refi. The lender required 73% LTV, which is designed to protect the lender, not to give you cash extraction.
This is the reality of BRRRR in this market: you do not always pull out cash on the first cycle. Instead, you hold the property, the tenant pays rent (even if negative cash flow), the mortgage principal is paid down, and in 3-5 years you can do a cash-out refi or sell at a profit.
The alternative scenario: higher ARV, better cash extraction
Let me show a more favorable scenario. Same property, but with better market conditions or more successful rehab results in a higher ARV:
Purchase price: $180,000 Rehab: $34,000 Carrying costs (6 months): $11,000 Total cash in: $88,180 (same as before)
Appraised value after rehab: $260,000 (stronger comps, better market) New loan at 73% LTV: $260,000 × 0.73 = $189,800
Hard money payoff: $193,554 Shortfall: $189,800 − $193,554 = −$3,754
You bring $3,754 to closing. Refi costs: $3,500. Net cash to closing: $7,254.
Total cash invested: $88,180 + $7,254 = $95,434
New monthly mortgage: $1,235 (on $189,800 at 6.5%) Monthly cash flow (same expenses): $1,400 − $1,235 − $622 = −$457
Still negative. The issue persists: the loan is too large relative to the rent. This is the trap many BRRRR operators fall into: they focus on cash extraction at refi time but do not evaluate long-term cash flow.
The corrected scenario: aiming for positive cash flow
To make BRRRR work long-term, you need to either (a) buy at a larger discount, (b) force higher ARV through better rehab, or (c) aim for properties with higher rent-to-value ratios.
Let us try again:
Purchase price: $150,000 (a distressed property, deeper discount) Rehab: $30,000 Carrying costs: $9,000 Total cash in: $71,180
Appraised value: $230,000 New loan at 73% LTV: $167,900
Hard money payoff (original $150K + $3K origination + interest of ~$8K + tax/insurance $900): $162,900
Shortfall: $167,900 − $162,900 = $5,000 (cash out!)
You get $5,000 cash at refi minus $3,500 in refi costs = $1,500 net cash out.
Total cash invested: $71,180 (you got $1,500 back, so effectively $69,680)
Rent: $1,300/month (properties in this price range rent for less) New mortgage: $1,095 (on $167,900 at 6.5%) Monthly cash flow: $1,300 − $1,095 − $622 = −$417
Still tight. But now you only invested $69,680 instead of $95,434. If the property appreciates 3% per year and you hold it 5 years, you gain $33,000 in appreciation. Plus the tenant is paying down principal ($200-$300/month). Over 5 years, that is $12,000-$18,000 in principal paydown. Total return: $33K + $15K = $48K on a $69K investment = 70% total return over 5 years, or roughly 11% annualized.
This is not extraordinary, but it is competitive with stock market returns, and you have leverage and real estate appreciation on your side.
Key BRRRR metrics
When analyzing a BRRRR deal, track these:
Cash-on-cash return (year 1): Annual cash flow ÷ initial cash invested. If you invest $70K and the property generates −$5K of cash flow year 1, your cash-on-cash is −7%. If it generates +$3K, your cash-on-cash is +4%.
Total cash invested: Down payment + rehab + carrying costs + cash brought to refi closing. This is your actual capital at risk.
Cash extracted at refi: The amount of cash you receive after paying off hard money, refi costs, and any closing costs. If you get $0, that is fine—you are still building equity.
Long-term cash flow: Rent minus mortgage, taxes, insurance, maintenance, and management. Many BRRRR deals are negative in year 1-2 but improve as the mortgage is paid down.
How it flows
Next
The math reveals that not all BRRRR deals are cash-flow positive immediately. The next article addresses the reality: sometimes BRRRR leaves money on the table, and understanding when it does (and why) is crucial to deciding whether BRRRR is the right strategy for your market and capital.