Capital Appreciation

Capital appreciation is the increase in an asset's value over time. Most rental investors wait for it from the market. BRRRR forces it: the rehab raises the property from a distressed price to a finished value in months, and the refinance turns that gain into cash. Forced appreciation is the mechanism the whole strategy runs on.

On the default deal, $150,000 of purchase and $40,000 of rehab become a $260,000 appraisal. The $54,175 of equity created, ARV minus total project cost, is appreciation the investor manufactured rather than waited for.

The refinance monetizes it without a sale, which means without selling costs or capital gains tax. Market appreciation after the refinance is on top, and leverage magnifies it: a 3% rise on $260,000 is $7,800 against $16,675 of cash left in. It also magnifies a decline, and an investor with 75% loans on every property has little cushion when values fall.

Further reading: Capital Appreciation on Wikipedia.