Refurb Duplex, STR, cash out refi; advice on refi strategy?

[Samuel W.]

Hi All!

I'm about to close on my first deal on 5/30 in San Diego, CA!!!!

It's a currently occupied duplex, that is rented waaay below market: $1,700/mo, $2000/mo respectively. Other units in the same neighborhood, same model, are renting at $3,395/mo each.

One tenant is currently month to month, and the other's lease is up in August.

We want to renovate ASAP! The same model home, upgraded, just one block over, sold in April for $1.32M.

We purchased ours for $1.05M and can get it up to same/similar condition as the $1.32M property with minor investment (~$50k).

We plan to renovate as soon as we can get the tenants to vacate. We then plan to turn into a STR and cash out refinance ASAP to Repeat.

According to AirDNA, current ADR for 2bd and the zip is $286 with 83% occupancy (for slower months March-April). Since this is a duplex, total potential ADR is $572 for both units (~$14,242/month), with significant upside in the summer and holidays.

What is the best strategy for cash out re-financing here?

Some background:

For the purchase loan, we had to get a no-ratio program, 30 yr fixed interest only, 1% discount rate, with a 1 year prepayment penalty for this property as it was way under rented.

My W2 income (for loan qualification purposes) will significantly increase in July (due to stock awards), thus potentially opening more doors to other products/strategies.

I believe it will be worth paying the 2.5% (~$15,750) prepayment penalty to get the cash out in year one, but open to thoughts on this.

Thanks in advance for your help!! The BP community is amazing!!