I'm doing this right now...refinancing a property I just closed on this month, tenants in place. This house already has a closed in deck that was never recorded with the county,
so I can add >20% to the square footage with only some paperwork and fees. However, because I am refinancing within six months, I am limited to refinancing at my purchase price, regardless of where it appraises.
If I wait six months, I can make improvements and refi at a new appraisal value.
However, I was told there is a possible loophole. In my case, I own the house in an LLC. Theoretically, I could sell it to myself (or my wife) at a modest markup. Then refi within six months at the new sale price. Again, it would have to appraise at the new sale price.
Bounced it off my lender, and he said no...that kind of thing was a contributing factor to the housing crisis. I'm already way down the road with him on this refi anyway, so I'm not going to explore it any further. If I did, I would seek legal counsel.
Aside from lender disallowing this, how would you deal with the tax implications IE. short term capital gains tax? Also I believe the sale needs to be "an arms length transaction" which this is not....
Sounds like what you are currently doing is the best option.