BRRRR Method Risks: Where the Refinance Breaks Down

By Matthew Whitaker, founder of Evernest.

Quick disclaimer: This is education, not financial or lending advice. Lenders set their own rules on refinancing, including how long you must own a property first and how much they will lend. Treat every number in this post as an illustration and confirm yours with your lender and your own advisers.

The BRRRR pitch is simple. Buy a house, fix it up, pull almost all of your money back out, and do it again. Sometimes that really happens. A lot of the time, the math has a hole in it that nobody mentions until the refinance falls apart. I'm Matthew Whitaker, founder of Evernest. We manage thousands of homes across 50 markets, and I wrote the book How to Rent Your Home. Here is how BRRRR works and the specific places where it breaks.

The short version

The short version: BRRRR stands for buy, rehab, rent, refinance, repeat. You buy a house that needs work, fix it up, rent it, then refinance at the higher value to pull your cash back out. The strategy lives or dies at the refinance. A low appraisal, a rehab that runs over, a higher loan payment, and lender waiting periods can all break it. Protect yourself by buying with margin and stress testing every number.

What the BRRRR method is

BRRRR is a five-step loop. You buy a property that needs work, usually at a discount. You rehab it to raise its value. You rent it to a good resident. You refinance it based on the new, higher value, which pays off whatever you borrowed to buy and fix it. Then you take the cash that comes back and repeat the whole thing on the next house.

The appeal is obvious. If it works, you end up owning a rental with almost none of your own money still tied up in it, and you have cash to do it again.

A clean BRRRR example

Say you buy a rundown house for $135,000. You spend $40,000 on the rehab and another $10,000 on closing costs and the months you carry the property while the work gets done. You're all in at $185,000.

Now say the repaired house appraises for $250,000. That number is called the after repair value, or ARV. If a lender will refinance at 75% of that value, the new loan is $187,500. That pays you back the full $185,000 you put in, with a little left over. You own a rental with almost none of your own money in it.

That's the dream, and it's why people love this strategy. Here is the step where the whole thing quietly breaks.

Why the refinance is where BRRRR breaks

Everything before the refinance is in your control. You choose the house. You manage the rehab. You find the resident. But the refinance depends on an appraiser's opinion and a lender's rules. Both of those can move against you after you've already spent the money.

Break one: the appraisal comes in low

The most common failure is the appraisal. If that same house appraises at $225,000 instead of $250,000, a 75% loan is only $168,750. Now you're $16,250 short of getting your money back. That cash is stuck in the property, and your plan to repeat just got a lot slower.

Notice the leverage in that. A $25,000 gap in value turned into a $16,250 problem in your pocket.

Break two: the rehab runs over

Projects run over budget and over schedule. Every extra month costs you loan payments, insurance, and taxes while the house earns nothing. A rehab that runs $15,000 over doesn't just add $15,000. It also pushes your all-in number past what the refinance will return.

Break three: the new payment eats your cash flow

This is the one a lot of people miss. A bigger loan at today's rates means a bigger monthly payment, and the rental has to carry it.

Use an illustrative 7% rate on that $187,500 loan. The principal and interest payment comes to roughly $1,250 a month. Add taxes, insurance, maintenance, and management, and say that's another $700. That's about $1,950 a month in costs. If the house rents for $1,900, you're about $50 a month short, and that's before you set aside a dime for vacancy.

That's what people mean when they say BRRRR is harder than it used to be. When rates were low, pulling out all your money often left comfortable cash flow behind. At higher rates, the same house can pull your money out and leave you with a property that barely breaks even or loses money each month. You got your cash back, but you may have bought a rental that doesn't actually pay you back.

Break four: seasoning

Many lenders won't do a cash-out refinance until you've owned the property for a set period of time, and that period varies. If you have to wait six months or a year to refinance, you're either carrying a short-term loan or tying up your own cash the whole time. That cost needs to be in your math from day one.

How to protect yourself on a BRRRR deal

Build the margin into the purchase, not the plan. A common rule of thumb is to pay no more than 70% of the after repair value minus the cost of the rehab. On a $250,000 house with $40,000 of work, that rule points to a purchase price of about $135,000, which is exactly what our example used. It's a rule of thumb, not a guarantee, but it builds in room for the appraisal to come in low or the rehab to run over.

Stress test your numbers before you buy. Ask three questions:

• What if the appraisal is 10% lower?
• What if the rehab costs 20% more?
• What if the rate is a point higher than you expected?

If the deal only works when everything goes right, it isn't a deal. It's a hope.

"Infinite return" is a bit of a trick

There's a popular idea that if you pull out all of your money, your return is infinite because you have nothing left in the deal. It sounds clever, but it's a trick of the math. You didn't eliminate the investment. You replaced your cash with debt. The house still has to cover a bigger loan, still needs repairs over time, and still carries all the risk.

A better question than "did I get my money back?" is "what does this property pay me every month after every cost, and how much risk am I carrying to get it?"

BRRRR is active, not passive

Be honest about the work involved. BRRRR is an active strategy. You're running a construction project, managing a lender, then managing a resident, and you're often starting the next one before the first is settled.

Owners who do this well usually have three things: contractors they trust, a manager handling the rental side so the project doesn't get neglected, and enough cash reserves that a surprise doesn't sink them.

"What if the appraisal comes in low and I'm stuck?"

This is the pushback I hear most. You're not necessarily stuck, but you need a plan before you buy. You have three options:

• Keep the property with a smaller loan and leave some cash in the deal. It might still be a perfectly good rental.
• Ask for a second look at the appraisal if you have strong comparable sales that were missed.
• Wait and refinance later when the numbers are better.

What you can't do is plan the whole strategy around getting all your cash back and have no answer when you don't.

Quick recap

• BRRRR is buy, rehab, rent, refinance, repeat.
• It lives or dies at the refinance, where the appraisal, the lender's rules, and today's interest rate can all shift the outcome.
• The biggest risks are a low appraisal, a rehab that runs over, a higher payment that wipes out cash flow, and seasoning waits.
• Protect yourself by buying with margin, stress testing every number, and judging the deal by the cash flow it produces, not just how much cash it returns.

Frequently asked questions

What does BRRRR stand for in real estate?BRRRR stands for buy, rehab, rent, refinance, and repeat. You buy a property that needs work, renovate it to raise its value, rent it out, refinance based on the new higher value to pull your cash back out, and then use that cash to repeat the process on another house.

Does the BRRRR method still work?It can, but it is harder than when rates were low. A larger loan at a higher rate means a bigger monthly payment, and the rental has to carry it. In our example at a 7% rate, the house came out about $50 a month short before vacancy, even though the cash came back.

What is the biggest risk of the BRRRR method?The refinance. You control the purchase, the rehab, and the resident, but the refinance depends on an appraiser's opinion and a lender's rules. If the appraisal comes in low, a 75% loan may not return your cash, and your plan to repeat slows down.

What is the 70% rule for BRRRR?It's a rule of thumb: pay no more than 70% of the after repair value minus the cost of the rehab. On a $250,000 house with $40,000 of work, that points to about $135,000. It's not a guarantee, but it builds in room for a low appraisal or a rehab that runs over.

What is seasoning on a cash-out refinance?Seasoning is the length of time many lenders require you to own a property before they will do a cash-out refinance. It varies by lender. If you wait six months or a year, you are carrying a short-term loan or tying up your own cash the whole time, so build that cost into your math.

What happens if the BRRRR appraisal comes in low?You have options. You can keep the property with a smaller loan and leave some cash in the deal, ask for a second look at the appraisal if you have strong comparable sales that were missed, or wait and refinance later when the numbers are better. Have the plan before you buy.

Is getting all your money back out of a BRRRR deal a good measure of success?Not by itself. Pulling out all your cash doesn't remove the investment. It replaces your cash with debt. A better test is what the property pays you every month after every cost, and how much risk you carry to earn it.

Where to go from here

If you want to run the numbers on a deal before you commit, use the Evernest rental calculator and load in your own figures. If you'd rather have a team look at it with you, a free rental analysis will help you see what actually pencils out.

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