Leverage (Finance)

Leverage is the use of borrowed money to control an asset larger than your cash alone would buy. BRRRR is a leverage-recycling strategy: it uses short-term debt to acquire and improve a property, then long-term debt to recover the cash, so the same pool of capital finances one rental after another.

The recycling only works if each property can carry its permanent loan. Leverage magnifies returns when the property earns more than the debt costs and losses when it does not. At 7.25% a 30-year loan costs about 8.2% of the balance a year, so a property needs a cap rate above that for borrowing to help its cash return.

BRRRR investors often end up with 75% loans on every property and little cash in any of them. That is efficient in a rising market and fragile in a falling one: a 10% drop in values takes 40% of the equity, and a rent shortfall on several properties at once has no cushion. The strategy earns its keep when the rentals cash flow, not just when the refinances close.

Further reading: Leverage (Finance) on Wikipedia.