My BRRRR Formula For Cash Flowing Rental Properties

If you’re a long-term rental investor like me, accurately calculating your purchase price, renovation costs, and closing costs is critical before acquiring a rental property.

The key question is simple:

Will the property still cash flow after you complete the BRRRR strategy?

You also need to ask yourself:

• What interest rate will I refinance at?
• Do I have reserves if the rehab goes over budget?
• What’s my backup exit strategy if things don’t go as planned?

Here’s the framework I use.

Step 1: Determine the Maximum Offer

My offer formula is simple:

Offer = (70–75% of ARV) – Renovation Costs

Example

ARV: $150,000
Renovation Budget: $25,000

First calculate 75% of ARV:

$150,000 × 75% = $112,500

Then subtract the renovation budget:

$112,500 − $25,000 = $87,500 maximum offer

This gives me a blended loan-to-value (LTV) of 58.3% of ARV.

Simple.

Now let’s see how changing the renovation budget affects the offer.

Example with Higher Renovation Budget

ARV: $150,000
Renovation Budget: $40,000

$112,500 − $40,000 = $72,500 offer

That results in a 48.3% blended LTV.

The key takeaway:

Renovation costs drive the offer price.

• Higher renovation budget → lower offer
• Lower renovation budget → higher offer

If you ignore this rule, you will eventually overpay for a property.

Step 2: Estimate Cash Flow

Let’s go back to the first example:

ARV: $150,000
Renovation Budget: $25,000
Refinance Loan (75% of ARV): $112,500

I currently model my deals using a 7% interest rate.

Before calculating cash flow, I need to estimate the monthly rent.

For a 3-bedroom single-family rental in my market using Section 8, the average rent is about $1,300 per month.

Operating Expense Assumptions

I factor in:

• 5% vacancy
• 5% maintenance
• 5% management (even though we self-manage, our time has value)
• Property taxes: 0.85% annually
• Insurance: 0.75% annually

Step 3: Calculate Mortgage Payment

Loan amount: $112,500
Interest rate: 7%
Term: 30 years

Monthly principal and interest ≈ $748.48

Taxes:

$150,000 × 0.85% = $1,275/year = $106.25/month

Insurance:

$150,000 × 0.75% = $1,125/year = $93.75/month

Total PITI payment:

$748.48 + $106.25 + $93.75 = $948.48/month

Step 4: Net Cash Flow

Monthly rent: $1,300

Operating reserves:

Vacancy (5%) = $65
Maintenance (5%) = $65
Management (5%) = $65

Total operating reserves = $195

Effective rent after reserves:

$1,300 − $195 = $1,105

Cash flow after PITI:

$1,105 − $948.48 = $156.52/month

That produces a cap rate of approximately 8.8% based on total project cost of $112,500.

Not bad—and in this scenario I get all of my original investment back at refinance, meaning the cash flow is produced with little to no capital left in the deal.

Step 5: What If the Rehab Goes Over Budget?

Let’s say the renovation budget increases by $10,000.

Total investment becomes:

Purchase: $87,500
Renovation: $35,000

Total = $122,500

But the refinance loan is still capped at 75% of ARV, or $112,500.

That means $10,000 stays trapped in the deal.

Your cash flow remains the same, because your loan amount does not change—but your cash-on-cash return decreases because you now have capital left in the property.

Step 6: What If Rent Is Lower?

If Section 8 only approves $1,250/month instead of $1,300:

Vacancy, maintenance, and management (15%) = $187.50

Effective rent:

$1,250 − $187.50 = $1,062.50

Cash flow:

$1,062.50 − $948.48 = $114.02/month

Lower rent dramatically reduces your margin.

My Minimum Cash Flow Rule

I don’t base my floor strictly on percentage metrics like cap rate or cash-on-cash return.

Instead, I focus on minimum monthly net income per property.

For me, that number is $250 per month.

That may not seem like much, but when you scale it across a portfolio, it adds up quickly.

50 properties × $250 = $12,500/month
100 properties × $250 = $25,000/month

That’s real cash flow.

Why Renovating Properly Matters

Major maintenance can wipe out months—or years—of profit.

Just this week in my portfolio with three different properties:

• HVAC replacement: $7,600
• Collapsed sewer line: $3,000
• Washing machine replacement on an STR: $715

Total: $11,315

If this happened on a single property producing $351/month, it would erase 32 months of cash flow.

That’s why I prefer doing a full renovation upfront to reduce the chance of large repairs later.

But, the examples I gave do not meet my minimum monthly net so what’s the alternative?

Alternative Exit Strategies

Sometimes, even the best-laid BRRRR strategies hit a wall. Three key factors can force you to rethink your approach:

1. Over-budget renovations – If your rehab costs blow past your plan, holding the property may no longer be realistic.
2. Lower-than-expected rent – If the market won’t support your projected rent, cash flow may fall short.
3. Low appraisal on refinance – If your refinance appraisal comes in below expectations, pulling out equity or cashing out may be impossible.

Any one of these can drastically impact your cash flow.

Alternatives to consider:

• Flip to a retail buyer – Even if the profit is small—or you break even—you recover your investment and gain experience for your next project.
• Convert to a short-term rental – Tools like Airdna.co help you project monthly income. In some cases, short-term rentals outperform long-term rentals. We’ve done this a few times, and those properties have consistently cashed flow for several years.

Sometimes pivoting is not a setback—it’s an opportunity to maximize your return in a different way.

Every investor measures returns differently.

Some focus on:

• Net income
• Cap rate
• Cash-on-cash return
• ROI

Regardless of how you measure your returns, two numbers matter most:

1. Stay within your renovation budget
2. Make sure your projected rent is realistic

If you nail those two variables, you’re on your way to building long-term wealth.

If you fudge the numbers, the deal will eventually expose the mistake and you will lose money.

The numbers don’t lie.