Most of the books, blogs, podcasts, etc...that I've read and listened to suggests not purchasing a property for BRRRR more than 70% ARV less the rehab costs. I understand that once you refinance, most lenders will loan up to 70% of the value which allows you pay yourself back the capital you invested or pay off your private lender/hard money loan. However, if you purchase and rehab costs are 70% of the ARV, how do you recoup the costs for closing and carrying costs to truly make these deals "no money invested"? It seems like because of these costs, you truly never get back 100% of your capital invested.
You don't. There are transaction costs associated with the process and some won't come back to you during the refinance.
Unless you buy at a significant discount where you own it for less than 75% LTV and can get back a bit more than you put in. Even in this case you'll have transaction cost that is lost but it'll be masked by the increased available payout
Everything @Alexander Felice stated. I do want to add that let's say you "leave" 10k in a deal because lower than expected appraisal (or whatever), and you net 300/M rent after all expenses and contingencies. You are earning 3,600 a year on the 10k investment not accounting for potential appreciation, loan paydown...etc.
That's still a great return (at least for me it is!). Yes you can run out of capital if are scaling fast and you leave a lot of money in every deal, but it's not the end of the world if it happens every so often.
If you're running the numbers with just purchase price and rehab, then the only way to get 100% of your money back is by finding a deal where your ARV less rehab costs is less than 70%, not just right at 70%. You should look for somewhere around 60% ARV minus rehab costs at this point to help cover closing/holding costs when you refinance.
If you add in your closing and holding costs into your deal analysis, then the 70% rule will work fine.
Way to think in advance. A lot of people won't consider closing/holding costs until it's too late.
You should include closing and carrying costs in your rehab costs. Most banks will also go up to 75%, so if you include those expenses in your rehab, you can go up to 75%. But I would highly recommend having at least some money in the bank so you can afford it if the rehab goes a bit high or the appraisal doesn't come in well.