In the middle of a BRRR... Need advice!
HI All,
First post on BP! I am a relatively new RE investor in the greater Milwaukee area. Just over 1 year ago, my wife and I bought a Duplex on the border of Shorewood and Whitefish Bay. For those outside of the area, this is one of the most or thee most A+ neighborhood in the metro and has a mix of single family houses and small multi family properties. Typical renters are families or young professional couples making well over the median income (on average).
At that time we purchased the house, the previous owner had just put on a new roof, two new furnaces and repainted the exterior to ready the house for sale. We paid $260,000 (about $108/sq ft.) for the house and financed it with an FHA loan with 3.5% down on a 30 year fixed mortgage. The average in the neighborhood is about $118/sq ft - $128/sq ft. for duplexes so we feel we got a great deal on our first property. When the sale went through, the appraisal magically came back exactly for the value of the purchase price, which was almost identical to the last city appraisal that was done prior to the roof, furnaces and painting.
Soon after we closed, we completed substantial renovation work on the house, putting a new kitchen and bathroom and electrical panel in the upper unit, adding central air and completely repainting both units, landscaping the entire yard, adding an additional parking space to the property and adding new fixtures to the bathroom and kitchen in the lower unit. All in, we put about $30K for rehab which we paid for completely in cash. All work was completely permitted as well.
For the last year, we have been living in the upper unit and the lower unit has been rented out to a tenant that pays $1225/month. Our plan is to live in the upper unit for another year (2 years total as our primary residence) and then move to another duplex that we would purchase at that time. Essentially a "house-hacking" strategy. We're pretty confident we could get about $1400+ per month for the upper once we rent it out.
The problem I now have is the refinance part of the BRRR. I've talked to a few banks about doing a refinance into a traditional mortgage to get out of the PMI charge. With the ARV (have very similar comps withing last 6 months and within 5 block radius) of the house and the equity that I currently have in it, it should be sitting at 20%+ LTV. Also, since we bought the house, home values and sales have increased over 10% Y/Y in our neighborhood. We had an appraisal done with a large bank at the 8 month mark because they said that they appraise on ARV and they'd refund the appraisal fee if it doesn't work out. The appraisal came back nearly identical to the purchase price meaning the refinance fell through. I'm not opposed to putting a minor amount of additional cash in to ensure I get the 20-25% LTV but don't want to put over $10K in.
My questions are:
1. Given all that has been done in upgrades as well as skyrocketing prices in the area, is there any way to ensure that an appraisal is realistic to ARV/present value and not just tied to historical sales price.
2. Am I using the BRRR strategy wrong?
3. Any other advice on the process?
Sorry for the long explanation but I wanted everyone to have an accurate background story. Any help would be much appreciated!