Using a HELOC/Cash/Stocks Purchase to then Cash out Refi

I want to give you some real value here, this is a strategy I'm currently executing, it goes right in line with @Brandon Turner's BRRR strategy, (Buy - Rehab - Rent - Refinance)  at least I think it does!

For this particular strategy, it is based on purchasing the property with cash up front.  How I generated the cash to purchase was a combination of getting a HELOC, some cash in checking, and then selling off some stocks that were completely stalled out and not generating any returns.  We are operating on the assumption that anytime you purchase with cash, you command more leverage with the seller, and therefore will get a discount (I get almost $10k off per property with cash).   Also, by rehabbing the property, you are drastically increasing the value, beyond what you paid for the purchase and rehab.  This increase in value, along with renting the property and producing cash flow, creates a strong appraised value from a lender which can then be cashed back out, sometimes (depending highly on appraised value) with more cash back then you actually invested in the first place.  This is a more aggressive approach, but take a look at the numbers below, this is exactly the deal I'm closing on shortly.  

Purchase price of 15 units: $280,000 (includes purchase + rehab costs)

total rental income: $7,000/mo = $84,000 yr.

Expenses:

Property Management: $8,400 (10%)

Taxes: $6000 (taxes in this state are capped at 2% of Taxable values which is typically based on the purchase price, not the rehabbed price (this could change if they catch up and assess the property after rehab)

Insurance: 5 properties x $600 = $3000 (Insurance covers the amount I purchased for, not the replacement cost, so my investment is covered, if anything happens I get my cash back and go find another house to do this with)   

Maintenance: $3,000 (Properties are freshly rehabbed so maintenance will not be high)

total expenses: $20,400

total net income: $63,600

cash on cash return: 63,600/280,000 = 22.7% (sick!)

Now the refinance cash out:

63,600 income/15% CAP rate = 424,000 value (what another investor would buy this for).  Let's be more conservative and say it appraises for $400,000 even though mine was higher.  

Finance 70% of 400,000 = $280,000 CASH BACK (my bank lets me do 80% of appraised value, but not all do, so we'll use 70% in this example).  

280,000 @5.5% interest rate (portfolio loan with 20 year amortization = $1900/mo. payments = $22,800 for the year)

To Summarize -

take your $63,600 in net income subtract 22,800 for debt service (loan payments) = $40,800 net income with NO CASH IN.  your returns are now exponential!!  That's $40,800 in pure passive income, without any of your own cash in the deal.  

NOW YOU HAVE OPTIONS

1)  Be conservative and pay back your HELOC, bank the rest for emergencies

2)  Take your $280,000 and go to the casino and play black or red and get real aggressive (not recommending this!)

3)  Take your $280,000 and do the same thing all over again

4)  Take your $280,000 and buy a new set of properties, this time you don't cash out refi and just let the cash earn strong returns

This is an incredible strategy - of course, it will take some work, and patience, and you will experience some snags (like an appraiser who doesn't know what he's doing and must be replaced which happened to me!).  Getting your HELOC takes time, selling stocks, moving your cash around, finding the right team to purchase from and rehab your properties, and getting tenants in place, all takes some time and effort but look at the rewards!

Any questions/comments, let me know!