Home Equity

Equity is the slice of a home's value the owner holds free of any loan. The BRRRR method is a way to create equity through a discounted purchase and a rehab, then pull much of it out with a cash-out refinance to fund the next deal.

On the default deal, the property appraises at $500,000 and the refinance loan is $375,000, leaving $125,000 of equity. The investor has only $27,600 of their own cash still in the property, so most of that equity was created, not paid for.

Equity left in the property earns no cash flow on its own. It grows as the loan is paid down and the value rises, and a later refinance or home equity loan can tap it again. How much equity to leave behind is a trade-off between cash flow and cash to reinvest.

Further reading: Home Equity on Wikipedia.