Wrapping my head around the BRRRR strategy

[Adam Allard]

So I'm still trying to fully wrap my head around the BRRRR strategy. I'm going to try and explain what I think I know thus far, and hopefully someone can chime in to correct me or fill in the blanks.

I know I'll be over-generalizing a lot of things here, but I'm still just trying to understand the overall concept of it first. For my example, I'm going to use ficticious but easy to use numbers.

Let's say I find a house that needs a lot of work that costs $500. I figure this house needs about $250 put into it, and it can be worth $1000. Using the 70% rule, I talk the seller down to $450. [($1000 X 70%) – $250 =$450]. So, I don't have any of my own money, so I go find a private lender to loan me $700 so I can fully finance the project. [$450 + $250 = $700]

Fast forward, and now the house is fully rehabbed, I already found and placed some great tenants, and I got the house re-appraised. It's now worth $1000. Now, I need to go to a bank/credit union to refinance this property, looking for a 70-80% loan to value.

This is where I seem to get confused/ fuzzy on the details (if I'm not already off track). 

Assuming I need a 20% down-payment to get an 80% LTV, I'd have to come up with $200 for my down-payment. So I'd give the bank $200, and they'd give me $800 (which is 80% of the value of the home, $1000). So now I can pay off my private lender (whom I owe $700 to) and I get to keep $100.

Do I have this concept correct? I know I generalized a lot there (like I'm assuming the bank doesn't just give me a $800 cash, so not sure how I'd actually pay off the private lender, as well as taking into consideration the seasoning period, or not accounting for the expenses accured during rehab, etc.) but I'm just trying to get the big picture idea of how the numbers work. Any more insight to help solidify the idea behind this strategy would be much appreciated. 

[Neil Sinha]

They're not. I'm using this as a comparison on where that remaining 20% in the 80/20 LTV normally goes. Since the seller is out of the picture, the 20% value the bank isn't financing is in the worth of the property now it's rehabbed. You created it by relieving the distress to the property. So, you don't need to pay the bank $200 to get $800. They give you $800 because there's an additional $200 market value in the house beyond what they're lending you.