Tapping Dead Equity to increase total ROI on a Deal - Crazy ??

[Jeff V.]

So I've been doing some digging and reading on the use of leverage and how to use it properly to exponentially increase your ROI.

I've written out a hypothetical deal below in which I use the BRRR method to purchase, renovate, rent and refinance a deal where I'm all in at 60% LTV and then use the 40% equity to purchase a note with the sole purpose of increasing ROI and to hedge slightly against vacancy expenses.

After running the numbers I realize it's not possible with the entire 40% due to banks lending on 80% LTV max, but looks like it's doable with only 20% equity as well.

This is just a theory of a possible strategy. Looking for some advice and to poke some holes in the plan.  Also if your using a similar strategy, that's proven successful I would love to hear it.

Here are the numbers:

Cash Purchase

ARV 100k

All In 60k

Rent 1,000

Expenses 480

Cash Flow 520/mo or $6240/yr

Property Cap Rate 10.4%

Unleveraged ROI 10.4%

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Refinance Terms 20 yr @ 5%

Down Payment 3000

Financed AMT 57k

Payments $376.17/ mo or 4514.04 /yr

Loan Constant 7.9%

Spread 2.5%

Cash Flow after Financing $1725.96/yr

Leveraged ROI 57.5%

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Note Info to bank (Expenses) --- Basically Taking a second for simplified math real world would be full 80% LTV Loan.

Principal 40k

MTG Info

Interest 5%

Term 20 yr

Loan Costant 7.9%

PMT 263.98/mo or $3167.76/yr

Note Info to Investor (Income)

Interest 12%

Term 20 yr

Spread 7%

PMT 440.43/mo or $5285.16/yr

Arbitrage Cashflow $2117.40

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Total Cashflow Rental + Note = $3843.36

Total Deal ROI 128.11%

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What are your thoughts?  I haven't seen any similar strategies in the forums so figured I would post and get some feedback.  

Benefits Include:

Additional Cashflow, Hedge against Vacancy Expenses, Additional Cashflow to Pay off Rentals Faster, Additional Cashflow to supplement retirement income.  Note is actually more profitable than the rental with less headache.

Drawbacks:

Possibly over leveraging, if note defaults may put rental into negative cashflow situation.