Issue understanding the BRRRR method

[Matthew M.]

Hello and thank you for taking the time to read and lend insight.

Some background, Ive been following bigger pockets for a couple of years now and plan to purchase my first property this year. I would like some clarification and maybe some insight into a question I have on BRRRR. I currently live in NYC and do not wish too or have the capital to invest here, therefore I plan on investing out of state. With 2 likely areas being Philadelphia or possible locations in FL. I currently do not believe I have enough capital to purchase a property outright. $40,000+ cash / possibly adding another $40,000 with a withdrawal from my ira which I do not want to do as I will take a massive penalty on this distribution.

I understand that purchasing a property cash forces equity and enables the acquisition of better deals.

But....

Why can't I for example purchase a property with a 25% down payment, finance the rehab, rent, refinance, and payback the loans while possibly making a small profit. Retrieving my capital back and repeating. Not including closing costs, rent and ROI heres my thinking.

Very rough example:

Purchase price - $80,000

Downpayment - $20,000

Rehab - $40,000

Mortgage - $60,000 / Rehab loan - $40,000

ARV $160,000

Refinance at 75% - $120,000

Payback loans and break even. Why wouldn't this work as opposed to paying cash for property.

[Ethan Giller]

Many people do use this method, it's the primary reason that hard money loans exist (typically 1-3 points and 9-14% interest). Your $40K plus the hard money loan would be enough for you to renovate a single family rental in many Philly neighborhoods, and then rent it and refi out. 

Investing out of state has its own challenges but that's a separate discussion.