SFR Foreclosure - BRRRR vs. HELOC financing

[Cynthia Oistad]

Hi!  I'm interested to hear feedback on two creative financing scenarios on the below fictional single family home property: 

• Investment property purchase price: $200,000
• Rehab Cost Estimate: $45,000
• ARV: $300,000
• 25% downpayment + closing costs+ rehab = $95,000

HELOC + Mortgage Option 1:  

1. Home equity line of credit for the $95,000 at interest rate of 5.5%.  Fixed rate.  $50 annual fee.  15 year term.
2. Open a traditional mortgage for the new investment property, borrowing $150,000 (75% of $200,000 purchase price) at 4.5% interest + closing costs.  30-year payback term. 

BRRRR Option 2:  

1. BUY: Open a new 30-year mortgage with bank on a paid-off rental home that we own (valued at $285K-$300K) for $200,000 to purchase the new investment property in "cash".  5.5% interest + closing costs for this mortgage.
2. REHAB: Take out a HELOC loan for the $45,000 rehab costs at 5.5% interest. At this point we would be about $253K invested into the deal after closing costs. Rehab the property.
3. REFINANCE: If all goes well and the fixed-up property appraises for $300K after renovations, then refinance the property for a new 75% LTV loan of $225,000 at 4.5% interest + $7K or so in refinance loan fees?
4. PAY BACK the $200K Mortgage and pay as much back as we could on the $45K HELOC loan (about $18,000). At the end of the day, we would own the new property and only have $27,000 in a HELOC loan left.

Want to know how to apply BRRRR strategy if we are using a mortgage rather than cash/private money lender/hard money for the $200K purchase price?  Are there bank penalties for paying off the 30-year mortgage that early (less than 1 year) after the rehab/refinance?

I'm interested to hear insights from this group as I try to learn more about creative investment strategies.

thanks!

Cynthia

[Cynthia Oistad]

@Jaysen Medhurst, thank you!! so if I'm hearing you right, we would take out a HELOC for $245,000 (or as much as we could get based on appraisal of our paid off investment home) which would be $200,000 purchase price + $45,000 rehab costs? Then we would refinance the new property and pay off as much of the HELOC as we could so we could use that money again on next deal?