Rental Refi Question

6 Replies

Good Afternoon Everyone,

This is my first time posting on BP, I will try to be brief. I bought my first property a little over a year ago and am looking to buy another. I had a question regarding financing and was hoping for some advice on how to proceed. I will explain my current situation below:

I bought a house that needed a substantial amount of work at a discounted price ($93,500) with a plan to fix it up and live in it for five years. The renovation took 4 months and cost about $12,000 total because I did 90% of the work myself. The market in the area has performed well recently and the house is currently valued at $130,000. I had an opportunity a few months ago to live for free, which I decided to take advantage of. Instead of selling my property I decided to keep it as a rental. I am now renting the property out for about a $250 profit a month. After listening to BP podcasts recently I realized I essentially did the BRRRR strategy without even knowing it.

I am stuck on the refinance portion. I recently contacted a local bank to talk about re financing options but they said in order to refinance the property needs to be owner occupied. So that brings me to my current question, I am wondering how to proceed. By looking at the numbers I would qualify for a $32,000 HELOC (at 90%) but apparently I need to be living there in order to take advantage of that?

I would greatly appreciate any advice at all! I am looking to repeat the process on a multi family house in the near future but the owner occupied rules are throwing me off.

Thanks again!

Hopefully I can make this simple... it gets asked a lot. 

You CAN do cash out refi on investment property and you CAN do a HELOC (harder to find a lender).

If you buy a house CASH and below apprised value or you do work to increase the appraised value you can get UP TO 80% of the appraised value back out of it. Key being you have no loan on this and it was all cash purchase. This is called delayed financing. 

If you buy w/ a loan (like you did) then you are limited to UP TO 80% of the purchase price. No matter how much appreciation you see you're limited to purchase price for 6-12mo (12 more common) know as seasoning. Once you're done w/ seasoning then it's UP TO 80% of the new appraised value.

Now w/ respect to rehab depending on what you did you MIGHT be able to get exemption and have that cost added to the purchase price. You're more likely though to benefit from the new appraised value though once done (even more so since you did the work).

Also, it's often overlooked but you're going to have new closing costs for the loan.... which probably are going to be a couple grand. Also, appraisal and market values can be different and it might be lower than you're expecting. It'll probably also kill your cashflow.... 

Heloc is going to work pretty much the same way but it'll take into account your current loan amount. 

Okay thank you, I just want to make sure I understand correctly. I would be able to refi for 80% of the 130k (since I have owned for more then 1 yr). For example, I could refi for 104k then subtract the remaining loan balance (93k) leaving me with 11k? But that does not include the closing costs associated with refinancing....

If that is the case I am most likely better off leaving everything how it is and try to figure out a different financing avenue for the purchase of a property?

Originally posted by @James Chandler :

Okay thank you, I just want to make sure I understand correctly. I would be able to refi for 80% of the 130k (since I have owned for more then 1 yr). For example, I could refi for 104k then subtract the remaining loan balance (93k) leaving me with 11k? But that does not include the closing costs associated with refinancing....

If that is the case I am most likely better off leaving everything how it is and try to figure out a different financing avenue for the purchase of a property?

For a cash out refinance on a SFR investment property, Fannie and Freddie both cap you at 75% LTV actually. Assuming you want good 30YF financing. After closing costs, I don't think it would be worth it.

Originally posted by @Chris Mason :
Originally posted by @James Chandler:

Okay thank you, I just want to make sure I understand correctly. I would be able to refi for 80% of the 130k (since I have owned for more then 1 yr). For example, I could refi for 104k then subtract the remaining loan balance (93k) leaving me with 11k? But that does not include the closing costs associated with refinancing....

If that is the case I am most likely better off leaving everything how it is and try to figure out a different financing avenue for the purchase of a property?

For a cash out refinance on a SFR investment property, Fannie and Freddie both cap you at 75% LTV actually. Assuming you want good 30YF financing. After closing costs, I don't think it would be worth it.

Interesting.... would delayed still allow 80% (assuming yes based on no previous loan)? Any clue on why they see the two transactions differently enough to change the LTV?

Originally posted by @Matt K. :
Originally posted by @Chris Mason:
Originally posted by @James Chandler:

Okay thank you, I just want to make sure I understand correctly. I would be able to refi for 80% of the 130k (since I have owned for more then 1 yr). For example, I could refi for 104k then subtract the remaining loan balance (93k) leaving me with 11k? But that does not include the closing costs associated with refinancing....

If that is the case I am most likely better off leaving everything how it is and try to figure out a different financing avenue for the purchase of a property?

For a cash out refinance on a SFR investment property, Fannie and Freddie both cap you at 75% LTV actually. Assuming you want good 30YF financing. After closing costs, I don't think it would be worth it.

Interesting.... would delayed still allow 80% (assuming yes based on no previous loan)? Any clue on why they see the two transactions differently enough to change the LTV?

80% is max cash out for a primary residence. One thing that I think trips people up is "purpose of loan" also determines LTV limit, not just occupancy. A rate and term refi on a SFR investment property, for example, can go to 85%.

Howdy @James Chandler

You can refinance an investment property (non owner occupied).  The local bank you spoke to is not the only bank.  Keep calling other banks and credit unions.  

However, as @Chris Mason pointed out your numbers would not fit within the actual loan amount you could qualify for.

To do a Cash-out Refinance loan on your investment property you would only get around $97,500 (75% LTV). Your total All-in Cost basis (excluding Closing and Holding costs) is $105,500 ($93,500 Purchase price + $12,000 Rehab costs). As you acknowledged you could payoff the loan but closing costs would just about eat up any remainder. In other words it's not worth it at this time.

If you pursue a HELOC you will find the same problem. It also will be based on a LTV percentage. If you do not have much equity in the property yet then you would have a minimum amount to use for a HELOC.

In the future if you plan to use the BRRRR strategy I find it best to target a 70% of ARV/LTV for your All-in Cost basis. That includes purchase price, Rehab costs, Holding and Closing costs. For your current property that would be $91,000 (70% LTV). In other words your numbers should have been more like $69,000 purchase price, $12,000 Rehab costs, $10,000 Holding and Closing costs (2 Closings).

Why 70%? Because Rehab costs have known to go over budget. Appraisals have come in lower than expected. And you might only be able to get a 70% LTV versus 75%. Be conservative up front and you will have more successful BRRRR deals.

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