The 75% Rule Lies — A BRRRR at 73% That Still Loses Money

What the 75% rule actually says

The standard version: take your all-in cost — purchase price, closing costs, rehab budget, holding costs, hard money interest and points — and compare it to ARV. If your all-in number is at or below 75% of ARV, the bank refinances you at 75% LTV on that ARV, and the check pays off everything you put in. Full BRRRR.

I've been running this math on my own deals for years. It's a useful tripwire. If you can't get a deal under 75% on paper, before anything goes wrong, you're not buying a BRRRR — you're buying a rental with extra steps.

But on paper isn't how deals close. Deals close with appraiser opinions, refi closing costs, and rent rolls that don't match the spreadsheet. So let's walk through one that hits 73% — and still leaves the operator wishing he'd passed.

The three places the rule lies, in order of frequency: refi closing costs that disappear from the math, appraisals that come in soft, and rent that prints below the underwriting midpoint. Any one of them on its own is survivable. Two of them stacked turns a clean full-BRRRR into a partial. All three at once turns it into a deal you'd rather not have done.

The deal on paper

Typical OKC single-family, 3/2, 1,300 square feet. Numbers are illustrative — round and clean so the math is easy to follow — but every line item is in range for what actually shows up on these deals.

• Purchase: $120,000
• Closing on the buy: $3,500
• Rehab budget: $45,000
• Hard money: 6 months at 11%, 2 points on the purchase + rehab
• Holding costs during rehab: $390/mo (taxes, insurance, utilities)
• ARV target: $235,000
• Rent target: $1,850/mo

Run the all-in: purchase + closing ($123.5k) + rehab ($45k) + HM points and interest (~$8.5k on the blended balance over six months with a draw schedule on the rehab side) + six months of holding ($2,340). All-in lands at roughly $179,300.

$179,300 ÷ $235,000 = 76.3%. Tight but workable. Tighten the rehab by $7k — call it $38k by leaning on your own crew instead of a GC — and you're at 73.3%. On paper, this is a deal. The 75% rule says you're going to get all your money back.

Lie #1 — Refi closing costs come out of the cash-out

The bank lends you 75% of ARV. The 75% rule pretends that's the check you walk away with. It isn't. Title, origination, appraisal, lender fees, escrows, recording — on a ~$175k refi loan that's typically $3,000–$5,000. Call it $4,000 for this example.

At a clean $235k ARV with 75% LTV, the bank cuts you a $176,250 loan. After $4,000 in refi closing, you net $172,250 against $172,300 all-in (we rounded). You're flat. Not the $2k cash back the underwrite promised — flat. And that's before anything else goes wrong.

Most BRRRR calculators bury this. They add the buy-side closing costs and ignore the refi-side closing costs entirely. If your underwrite doesn't carry both, you're shorting yourself ~$4k of trapped capital on every deal.

Side note that catches operators sideways: prepaid escrows. Most refis collect 2–6 months of taxes and insurance into escrow at closing. You get that money back eventually when it pays bills you would have paid anyway — so it's not a true cost — but it comes out of your cash-out check on day one. If your refi check arrives $2k lighter than the calculator promised, escrow is usually the reason.

Lie #2 — Appraisal risk eats your margin

ARV is your number until the appraiser writes their number. I've had appraisals come in at $245k when I underwrote $235k. I've also had them come in at $222k. Comps in hot pockets move month to month. New construction across the street prints a comp; a foreclosure two blocks over kills one.

On our deal, the appraiser comes back at $228k. A 3% miss. Not catastrophic — totally normal. Now 75% LTV on $228k is $171,000. After $4k refi closing, the check is $167,000. All-in was $172,300.

You just left $5,300 stuck in the deal. The 75% rule said full BRRRR. The appraiser said partial BRRRR. The appraiser wins every time.

And $228k isn't a worst-case. Worst-case is the appraiser pulls comps that all sold in the prior bull six months and don't adjust for the cooling pocket your subject property sits in. Worst-case is $218k — and now you're $11k stuck on a deal that underwrote as a full BRRRR. The point isn't that appraisers are bad at their job. The point is that ARV is an opinion until it's a closing document, and every underwrite needs to assume some version of that opinion lands below your target. (For the investor read on a soft report and when to push back, see how to read an appraisal as an investor.)

Lie #3 — Rent comes in light

You underwrote $1,850. The market accepts $1,750. Happens constantly. You ran zip-code averages, the appraiser ran the actual block, your property manager ran what comparable units rented for in the last 60 days — and the answer is $1,750 if you want it filled this month.

That $100/mo gap doesn't kill the deal by itself. But it kills the assumption the entire BRRRR premise was leaning on: that cash flow would cover the new mortgage payment comfortably enough that the small amount of cash stuck wouldn't matter.

On $1,750 rent with a $171k refi at 8.5% (30-year amortization on investment property, call it ~$1,315/mo P&I), taxes ($210), insurance ($95), management (8% = $140), maintenance reserve (5% = $87), CapEx reserve (5% = $87), vacancy (8% = $140) — you're left with roughly $324/mo in cash flow. Not bad in isolation. Brutal when you stack it against the next problem.

And those reserves aren't optional. People skip them to make the spreadsheet look better. The roof has a finite life. The HVAC has a finite life. Water heaters, flooring, paint between tenants, turnover make-readies — they all hit eventually. If your underwrite assumes zero CapEx, you're not running a P&L, you're running a fantasy. The day a $7,000 HVAC replacement lands, the unreserved deal is suddenly two years of cash flow underwater.

The full picture — 73% deal, mediocre outcome

Let's stack it. The deal passed 73% on paper. Reality after refi:

• Cash stuck after refi closing + appraisal miss: ~$5,300
• Monthly cash flow on actual rent: ~$324
• Annual cash flow: ~$3,888
• Cash-on-cash on stuck capital: ~73%

On paper, 73% cash-on-cash looks insane. But that's a denominator illusion — the denominator is tiny because you mostly recycled the capital. The honest read: you spent six months of operator energy to net out roughly $4k a year on a $228k asset. Total ROI including appreciation and amortization is fine. The deal still passed. But it's not the deal the 75% rule promised, and it's not a deal you'd underwrite a second time at these inputs.

The whole reason BRRRR works at scale is that you redeploy capital fast. The deal above ties up six months of attention, leaves $5k stuck, and produces a rental that does what any decent buy-and-hold would do. The 75% rule said you won. The P&L says you got average. Average isn't why you're doing this.

Run the opportunity cost. Six months of operator time, $5k of trapped capital, the mental load of one more door in the portfolio, and the lender relationship you burned on a refi appraisal that came in soft. That same six months could have gone into a flip with $35k of net profit, or two cleaner BRRRRs at 68% all-in that actually pulled all capital back. The 75% rule doesn't price opportunity cost — it just tells you whether you can technically force a refinance through. Those are different questions.

What the operator should have done differently

Four changes, in order of how much pain they would have saved.

1. Underwrite to 70%, not 75%.Five points of buffer is the difference between a deal that survives a 3% appraisal miss and a deal that turns into a partial BRRRR. I don't move forward at 73% anymore. Either I'm buying the property cheaper or I'm cutting the rehab — usually both. If neither lever moves, pass.

2. Underwrite rent at the low end of the range, not the midpoint.Your property manager will quote you a range. Use the bottom of it. Anything above is upside. If a deal only works at the top of the rent range, it's not a deal — it's a hope.

3. Always include refi closing costs in the all-in.$3k–$5k on every refi. Bake it in. The calculators that hide this number aren't doing you a favor.

4. Run the rental math separately. The 75% rule tells you about capital recovery. It tells you nothing about whether the property cash flows. A full BRRRR with $200/mo cash flow on an aging roof and a 30-year-old HVAC is a negative-cash-flow property waiting to happen. Two separate tests. Both have to pass.

The actual rule, rewritten

Here's how I think about it now after running this on 70+ doors:

The 75% rule is a screen for whether the deal canwork. It's the minimum-viable-product test. To know whether the deal actually works, you need three more passes:

• All-in including refi closing under 70% of ARV. Buffer for appraisal.
• Cash flow at low-end rent covers debt + reserves + 10%+ DSCR. Survives a bad month.
• Either a full refi recovery or strong cash-on-cash on stuck capital — pick one. Mediocre on both means pass.

Pass all three and the deal is real. Pass only the 75% screen and you're doing a deal because a YouTube formula said you should — not because the math actually penciled.

One more layer if you're running this at scale: track your hit rate. Of every ten deals that pass the 75% screen on paper, how many close at the all-in number you underwrote? How many appraised at or above target? How many leased at or above the midpoint of your rent range? If those rates aren't at least 7-out-of-10 each, you're underwriting too aggressively. Tighten the buffer until the rates climb. That's how you turn the rule from a coin flip into a system.

The takeaway

The 75% rule isn't wrong. It's incomplete. Operators who treat it as the deciding test end up with portfolios full of technically-passed deals that produce average returns and tie up attention they could have deployed somewhere better.

The fix is boring and unglamorous: underwrite tighter, stress-test rents downward, carry refi costs through the math, and run the rental P&L as a separate test. Do that on every deal and you'll pass more deals than you take — which is the right ratio.