BRRRR vs fix & flip strategies

[Elizabeth Justice]

My husband and I are in the option period of our first deal.  The house needs a lot of work, but nothing major came back on the inspection that we weren't aware of.  So after several offers it looks like we may finally close on a deal (yay!).  Because we don't have much cash, our plan is to rehab and sell it to build capital.  The numbers are:

ARV = 150K

Purchase = 72K

Rehab = 22K

Profit after closing costs, holding costs, loan costs = 29K (but I expect unexpected expense to lower that a little)

I'm interested in the BRRRR method, but my understanding is we could only refi for for 105K, or 70% of ARV. Our expenses of house (72K)+rehab(22K)+closing costs(1440)+loan costs(10K)+holding costs(3K) are almost 109K. So we would have to bring cash to the table for the refi.

So how do you make the BRRRR method work when you don't have a lot of cash and don't want to raid your 401K? Do you have to negotiate lower with this in mind, or do I have some assumptions wrong?

[Jennifer Beadles]

@Elizabeth Justice I've structured my BRRRR deals definitely to be able to maximize the new appraised value at 80 LTV by doing a 100% HML which includes the renovation budget. You'll pay more in interest, but your ROI will be higher in the end by not having to bring money to the table at the refinance.

The reason for this is you can do a regular refinance instead of a cash out refinance with a seasoning requirement/lower LTV.

Instead of putting a down payment I the HML collateralize the down payment amount either in the form of a second mortgage on another property, or in a bank account.

So the way I do it using your example would be:

80 LTV : $120K new max loan amount ($150K ARV x.8)

Closing costs can be rolled in, and the hard money lender would be paid off. You may have to make the monthly hard money loan payments out of pocket though, not sure you could find one who would do 100% financing + renovation funding + defer payments. 

Anyway, just another way to do these deals without coming to the table with more funds in the end.