Cash Out Refinance and building equity
Hello BiggerPockets Community, I have a question regarding building equity in a property by rehabbing a property and doing a cash out refinance after the seasoning period since the property has been purchased has been completed.
Hypothetically speaking, let’s say you purchase a rental property for $200k with a 20% down payment of $40k and completed $20k in rehab costs to update the property and get it rent ready.
Once the seasoning period ends, an appraisal is completed on the property for the cash out refinance and the appraiser determines the ARV of the property to be $255k, does this mean that the amount of equity in the property would be $65k? (Based upon the down payment and the amount spent on repairs completed on the property). Or is the amount of equity in the property based on the appraisers determination of the ARV of the property? (20% of $255k would be $51k in equity, not including principal pay down of the mortgage).
And let's say you complete the cash out refinance on the property at 75% LTV, would the correct amount of equity you'd be able to pull out of the property be $31,250 (75% LTV of $255k= $191,250 - $160k amount owed on original mortgage)= $31,250) any information or feedback would be greatly appreciated!!
Mortgage is $160,000 (20% down payment). You invest 20k in cash to increase value of home to 255,000. The LTV would become 62% because $160,000 owed on $255,000 value meaning your equity is now 38%. If you cashed out to 75% (191,250) that would be 31,250 (191,250 - 160,000).
Keep in mind that there are fees involved in refinancing so you would actually get under 30,000 back in cash, how much exactly will be depending on the lender and their fees
Your appraisal is the baseline of the refinance. If the appraisal comes back at $255,000 that would mean that the loan amount would be $191,250. (75% LTV max on a 1 unit rental property cash out)
$191,250 minus the current payoff and closing costs is what would be left for the cash back.
