Water-based exercise and low-intensity exercise in combination with blood flow restriction (BFR) are two methods that have independently been shown to improve muscle strength in those of advancing age. The objective of this study was to assess the long-term effect of water-based exercise in combination with BFR on maximum dynamic strength and functional capacity in post-menopausal women. Twenty-eight women underwent an 8-week water-based exercise program. The participants were randomly allocated to one of the three groups: (a) water exercise only, (b) water exercise + BFR, or (c) a non-exercise control group. Functional capacity (chair stand test, timed up and go test, gait speed, and dynamic balance) and strength testing were tested before and after the 8-week aquatic exercise program. The main findings were as follows: (1) water-based exercise in combination with BFR significantly increased the lower limb maximum strength which was not observed with water-based exercise alone and (2) water-based exercise, regardless of the application of BFR, increased functional performance measured by the timed up and go test over a control group. Although we used a healthy population in the current study, these findings may have important implications for those who may be contraindicated to using traditional resistance exercise. Future research should explore this promising modality in these clinical populations.