BRRRSR strategy - not a typo - sanity check and tax implications

[Antony Nguyen]

Hi Everyone!

This post is 2 questions in one, if it's suggested I post these separately let me know!

First off is my investment strategy. I have some capital to work with and can buy residential properties with cash. My goal is to find good deals, acquire with cash, rehab, rent, refi, and sell. With the refi money I pull out, I would add that to my working capital to do another cash purchase and repeat. I guess you can call this a BRRRSR strategy. The reason I want to buy single properties instead of putting down payments on multiple properties is that I am looking to buy at foreclosure auctions which of course require full cash payments. I can get a good deal, but the number of purchases I can transact is limited by the capital I have.

Here's a scenario that's pretty close to what I'm trying to accomplish:

1) acquire property with an ARV of $350K for $200K cash.

2) rehab, place tenant, season for 6 months

3) after 6 months, do a cashout refi based on ARV $350K, and pull out ~$262.5K. Here's the math, ignoring fees: with a 75% LTV mortage, 75% of $350K is $262.5K. Since I paid cash initially, this cashout is very large compared to partial down-payment investments. My net profit on top of the original $200K investment is $62.5K.

4) wait at least 2 years

5) after 2 years following the cashout refi, sell property at around ARV, $350K

(I am actually skipping/combining a part where I do a Delayed Finance loan to get 75% of my money back asap after the initial acquisition, then do the cashout refi based on ARV after 6 months of seasoning).

My first question is, are the above steps sound, strategically speaking? I am a newbie investor and want to know if the above math sounds right, or if I'm missing something and my numbers are wrong, specifically if the cashout amount is correct, again ignoring fees. For multiple reasons, I do not want to keep the property for more than 2.5 to 3 years, but am willing to keep the property for a couple years, as I've seen comments here on BP that selling quickly after a cashout refi raises eyebrows at the IRS.

Ultimately, I'm trying to buildup a pile of cash within a certain time frame to do larger commercial investments with higher potential gains (this part I'm sure about - don't try to convince me to stay forever in residential haha).

Assuming the fundamentals are correct, the next question is that of taxes. Let's say I sell the property at the ARV that the cashout refi is based-on, and I don't profit from the sale. I did however make $62.5K on the cashout (plus rental cashflow). My question is, is the cashout money ($62.5K) taxable in any way after the sale takes place? Obviously if I were to make a profit on a sale (say $375K sale price, $25K selling profit), I would want to 1031 exchange, but for the purpose of focusing on the cashout, I just want to break even on paying off the mortgage, thus no sale profits.

Any feedback on the above questions would be greatly appreciated!