Question for you BRRR loving people - My renovation on my first house-hack for my multi will be completed in the upcoming months. I used a 203K loan to fund the renovation.
$454,000 - Purchase Price
$124,000 - Renovation (Gut Job)
$578,000 - Current Mortgage
Based on my analysis (not an expert) but my ARV is looking around 700K (praying for more) once it's finished and I plan on refinancing my loan into a Conventional to get rid of PMI.
However, with 700K I'll be a few percentages shy of 20% equity. - I've spoken with mortgage companies who are willing to do 10% down Conventional loans where I would just pay PMI until I hit 20% and call to tell them to stop charging me for it.
So here's the math, if I am able to refi and get a new loan at 90% LTV of $700,000. (.90 x 700K) = $630,000.
I will then use that $630,000 to pay off Loan Number 1 of $578,000.
[Looks like my new mortgage payments would be similar as my current from using mortgage calc. with pmi.]
My excess cash is $52,000. This would essentially be my cash out refi. I would have to pay PMI for the next 5 years but at least my renters are paying for it.
But is my math correct???? Is there a catch with these mortgage deals, am I allowed to take that much cash out? Do I have to pay tax on the cash-out refi? I'm not very familiar with 10% conventional loans nor have I come across people doing this on BP refinancing less than 20% so I just want to pick your brains to see if my head is in the right place and my math is on par. Thanks in advance guys!
You only pay tax when you sell it, never for cash in or cash out. Conventional loans are different per state, same with Jumbo. Sounds like you would likely covert to a jumbo, and anything short of 10% (at least in my state) requires PMI. Also some lenders charge more to cash out, meaning your interest rate is higher than a straight refi. The math seems right, so you just need to figure out if you can handle the monthly payments at that level. It will also depend on what it appraises for.
Sounds like you got some bad info. You cannot do a 90% cash out refi using conventional financing. A cash out refi has a max of 75% LTV for a multifamily. You would only be able to do a rate/term refi, which is 85% max if this is a 2-unit, and 75% max if this is a 3 or 4-unit.
This is the part where I tell you to align yourself with a rockstar loan officer who can help you see the future and not put you into a position to get stuck. You need to know your numbers, and to be looking 2,3,4 moves ahead before you pull the trigger. And your LO should be looking out for you and not looking out for their pocket. They should have helped you with figuring out your exit strategy. At least that's what I do with my investor clients, and any LO worth their weight should.
If this is a 3 or 4-unit property, now you are going to be stuck in that 203K loan for awhile. Or you can do a FHA streamline refi if the rate sucks, but it's still FHA and the mortgage insurance isn't going away.
I'm not licensed in NJ, but if you need someone there, PM me and I can refer you.
@Michael Ferreira Thanks for the input Mike!
@Zack Karp - Thanks for the response!
Initially, I was told 80% LTV to refi with cash-out potential. Guess that's even out the window - Once I was running numbers I saw it was possible that getting 20% might not happen. I assume I can still do a conventional with under 20% but with no cash-out option which sucks (and pay PMI until I hit 20). I guess that makes sense as to why I never saw this happening on BP. Because you can't do it! lol ughhh.
It's a two-family. I appreciate your input. Will shoot you a PM, thanks!
Howdy @William Kwong
The way I approach a BRRRR deal is I make sure I have my Refinance loan lined up (prequalified or preapproved) prior to making the acquisition. You also need to establish your ARV and work backwards to determine your all-in costs. I always use 70% of the ARV as my target for all-in costs. I also always assumed a 75% LTV for the Refinance loan as @Zack Karp stated. I use these percentages to keep a conservative approach to my deals.
I see many investors like you trying to combine the House Hack and BRRRR strategies. As you are finding it is very difficult to do. Not impossible just difficult because you must force appreciation to grow enough to cover the additional 21.5% in equity with your renovation to meet the Refinance loan requirement. That is why you need to work backwards from the ARV to know your limits.
That makes a lot of sense. - My mistake was not getting preapproved for the refi.
Gotcha, yes forcing appreciation late in the game right now isn't fun lol but I do think it'll get there. - Will be working backwards and getting pre-approved on the refi for the next one! Thank you for the help. Cheers..