How to underwrite a BRRRR deal, step by step
To underwrite a BRRRR, estimate ARV from comps, set a maximum price with the 70% rule, and build a rehab budget with a 10–15% contingency. Total your all-in cost, model the cash-out refinance at 70–75% LTV against today's rate, then confirm the stabilized rent covers debt service with a healthy DSCR.
The steps in short
- Estimate ARV from comps. Find three to five recently sold, renovated comparable homes within half a mile to one mile, sold in the past three to six months, within 10–15% of the subject's finished square footage. ARV is what comparable finished homes actually closed at. It isn't your hoped-for sale price, and it isn't an average that quietly includes distressed sales. If the comps cluster at $215,000–$225,000, use the lower end of that range as your working ARV unless you have a specific reason to go higher.
- Set your maximum purchase price with the 70% rule. Maximum offer = (ARV × 0.70) − estimated rehab cost. On a $220,000 ARV with $45,000 in rehab, that is $154,000 − $45,000 = $109,000. The 70% threshold exists because the cash-out refinance on an investment property is typically capped at 70–75% LTV — so paying more than 70% of ARV means the refinance will not return all your invested capital. Deals that stretch past 75% of ARV at purchase require a thesis for why the refinance will cover a bigger number.
- Build the rehab budget with a contingency. Line out every scope item: demo, framing, electrical, plumbing, HVAC, roofing, drywall, flooring, kitchen, baths, exterior. Get at least one contractor walkthrough before finalizing the budget. Then add 10–15% as a contingency line and treat it as money already spent. Renovation budgets on older properties slip; a wall opened for a plumbing repair reveals knob-and-tube wiring, or a structural issue appears after demo. Plan to spend the whole contingency; on older houses you usually do.
- Calculate your total all-in cost. All-in cost = purchase price + rehab cost + carrying costs. Carrying costs during the renovation and seasoning period include hard money or bridge loan interest, property taxes, insurance, and utilities. On a deal requiring six months of renovation and six months of seasoning before refinancing, carrying costs can run $4,000–$8,000 on a small property financed with hard money. Get the actual rate and term from your lender before underwriting this line.
- Model the cash-out refinance. Assume a 70–75% LTV cap on the refinanced value. At ARV $220,000 and 75% LTV, the maximum loan is $165,000. Compare that to your all-in cost: if all-in was $159,500, the refinance returns $165,000 and you exit with $5,500 back plus a property carrying a $165,000 loan against $220,000 of value. Use today's rate plus a stress point (a full percentage point above current rates) for the payment calculation — seasoning requirements are typically 6–12 months, and rates can move. Model both the base case and the stressed rate.
- Check the stabilized rental: DSCR and cash-on-cash. With the refinance loan in place, underwrite the rental. Calculate NOI from market rent less a vacancy allowance and operating expenses. Divide NOI by annual debt service to get DSCR; conventional lenders look for 1.20–1.25, while dedicated DSCR programs may accept about 1.0 at a higher rate. Then calculate cash-on-cash return on any equity that stayed in the deal after the refinance. A successful BRRRR minimizes cash left in, but even a zero-cash-left deal needs rent that covers debt service with margin.
BRRRR underwriting answers two questions at once
Most buy-and-hold analysis asks one question: does the property cash-flow? BRRRR asks two. Can you pull most or all of your capital back out in the refinance, and does the loan you’re left with still cash-flow as a rental?
The two questions pull against each other. The refinance loan that returns your capital also becomes the debt service that has to be covered by rent. A larger loan returns more cash but eats more NOI. The arithmetic has to work on both ends at once, and the worked example below shows exactly where it breaks.
Step 1: Estimate ARV from comps
Every downstream number rides on ARV. Set it too high and the deal looks better than it is at every step after this one.
Find recently sold, renovated comparable homes — similar square footage, bedroom and bath count, lot size, and finish level to your planned exit product. Closed sales only, within the past three to six months, within half a mile to one mile. In thin markets you extend the search, but document each concession.
Three to five strong comps beat eight weak ones. If the comps cluster at $215,000–$225,000, use $218,000–$220,000 as your working ARV. Pricing to the top of the comp range assumes your rehab comes out perfect and the market holds. The bottom of the range is what you get when one of those comps sold a little hot.
For how to source the comps and adjust for differences between properties, see the guide on how to run comps.
Step 2: Set a maximum purchase price with the 70% rule
Maximum offer = (ARV × 0.70) − estimated rehab cost
The 70% rule works as a first-pass filter because it mirrors the refinance math. Investment-property cash-out refinances are typically capped at 70–75% LTV, so your all-in cost has to stay below that threshold for the deal to return most of your capital.
On an ARV of $220,000 with $45,000 in estimated rehab:
Maximum offer = ($220,000 × 0.70) − $45,000 = $154,000 − $45,000 = $109,000
If the asking price is $110,000, the deal is right at the edge. That small gap matters: the worked example below shows what happens to capital recycling when you are slightly over the strict threshold.
Step 3: Build the rehab budget with a contingency
Line out every scope item. Get at least one contractor walkthrough before locking a number. Then add a 10–15% contingency as its own line.
The contingency is not padding. Renovation budgets on older properties slip for specific reasons: demo reveals hidden damage, local code requires unexpected upgrades, material costs shift. Treat the contingency as money already spent when evaluating whether the deal works.
Step 4: Calculate your total all-in cost
All-in cost = purchase price + rehab cost + carrying costs
Carrying costs include hard money or bridge loan interest, property taxes, insurance, and utilities during the renovation and seasoning period. At 6–12 months of holding before refinancing, these add up.
Using the worked example throughout this guide:
| Item | Amount |
|---|---|
| Purchase price | $110,000 |
| Rehab cost | $45,000 |
| Carrying costs (6 months) | $4,500 |
| All-in cost | $159,500 |
Step 5: Model the cash-out refinance
Most investment-property lenders cap cash-out refinances at 70–75% LTV. Seasoning requirements — typically 6–12 months from closing — apply on conventional and many DSCR products.
At ARV $220,000 and 75% LTV:
| Item | Amount |
|---|---|
| ARV | $220,000 |
| Cash-out refinance (75% LTV) | $165,000 |
| All-in cost | $159,500 |
| Capital returned | $165,000 |
| Cash left in the deal | $0 ($5,500 returned above cost) |
The deal returns slightly more than the all-in cost. The property carries a $165,000 loan against $220,000 in value — $55,000 in equity, none of it the investor’s sunk cash. This is the best-case result the strategy is marketed on, and it requires every number above to hold.
Model the refinance rate with a stress point. A $165,000 loan at 7.5% over 30 years carries a monthly payment of about $1,154 (principal and interest). Use today’s published rate plus a full percentage point to account for where rates might be 6–12 months into the hold. That payment sets the debt-service floor rent has to clear.
Step 6: Check the stabilized rental
This is where most BRRRR analyses go quiet. The refinance step proves you got your capital back. This step proves what you got back with it — a rental that pays, or a liability with a loan on it.
With the $165,000 loan at $1,154/month P&I ($13,848/year), work backward from the rent you need.
To break even on debt service (cover P&I, not yet cash-flow positive). At a 40% operating-expense ratio, NOI = rent × 0.60. You need monthly NOI ≥ $1,154, so:
Minimum rent to break even ≈ $1,154 ÷ 0.60 ≈ ~$1,925/month
To satisfy a 1.25 DSCR (the level conventional lenders want; dedicated DSCR programs may go lower at a higher rate). Required annual NOI = $13,848 × 1.25 = $17,310, so monthly NOI = $1,442.50:
Minimum rent for 1.25 DSCR ≈ $1,442.50 ÷ 0.60 ≈ ~$2,400/month
If market rent for the renovated property is $2,100/month, the deal breaks even on debt service but won’t qualify for a standard DSCR loan at 1.25. That isn’t something to fix later. It’s a buy-or-pass call, and you make it before the earnest money goes in.
Run cash-on-cash return on whatever equity stayed in after the refinance. On a perfect recycle with nothing left in, there is no remaining cash basis to divide by, so cash-on-cash stops being the right yardstick — you judge the deal on the cash flow itself. On a deal where $20,000 stayed in, cash-on-cash is annual cash flow divided by that $20,000. Both cases matter for comparing BRRRR deals against each other and against conventional acquisitions.
Three things that change the math
Appraisal gap. The refinance appraisal is not your ARV — it is an independent appraiser’s conclusion. If your ARV was $220,000 and the appraisal comes in at $195,000, the refinance at 75% LTV yields $146,250, not $165,000. Against a $159,500 all-in cost, you fund a $13,250 gap yourself. Underwrite to a conservative ARV; know the minimum appraisal that still works before you close the purchase.
Rehab overruns. Every dollar of overrun above the contingency either raises all-in cost (less capital recycled) or gets funded from your next deal’s capital. Track costs against budget weekly and make scope decisions before a $5,000 problem becomes a $20,000 one.
Rate sensitivity. The refinance rate determines whether the rental cash-flows at all. A deal that breaks even at 7.5% bleeds cash at 8.5%. Run the stabilized rental at a rate a full point above current before you commit to the purchase.
The BRRRR method can accelerate portfolio growth when the numbers work. When they don’t — thin ARV, a soft rehab budget, or market rent that can’t support the refinance payment — it leaves you holding a leveraged rental that ate your capital and still can’t get a loan. Underwriting it this hard is how you find out which deal you have while you can still walk.
General information for real estate investors, not financial, legal, or tax advice. Specific thresholds and terms vary by lender, market, and program; confirm the numbers that apply to you with the relevant professional.
Frequently asked questions
What happens if the appraisal comes in below my ARV estimate?
The refinance loan shrinks. At 75% LTV on a $195,000 appraisal instead of $220,000, the maximum loan drops to $146,250 rather than $165,000. If your all-in cost was $159,500, you are $13,250 short and must fund the gap from another source. Set your ARV low enough that an appraisal a notch under it still works; you don't get to pick the appraiser's number.
How long do I need to hold the property before refinancing?
Most conventional and DSCR lenders require 6–12 months of seasoning from the closing date before they will consider a cash-out refinance on an investment property. Some portfolio lenders offer delayed financing (an immediate refinance) if you purchased with cash, but terms vary. Confirm your lender's seasoning requirement before you start the renovation clock.
Does the 70% rule work differently in a BRRRR than a flip?
The arithmetic is the same, but the purpose differs. In a flip, the 70% threshold protects your profit margin after all transaction costs. In a BRRRR, it protects your ability to refinance out most of your capital — because the refinance is also capped at roughly 70–75% LTV. A purchase above 75% of ARV makes a full capital recycle impossible from the start, regardless of how well the rehab goes.
What if rates are too high for the stabilized rental to cash-flow?
In today's rates that's a hard wall, not a number to talk yourself past. The BRRRR only works if the rental cash-flows with the refinance loan in place. If a $165,000 loan at 7.5% produces $1,154/month in debt service and rent cannot support that plus operating expenses at a 1.25 DSCR, the deal needs either a lower all-in cost, a higher ARV supported by comps, or a concession on return expectations.
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