Renovating to Refinance (My new Duplex)

5 Replies

Hey everyone!

I am trying to figure out how best to renovate my property for the best options of refinancing and getting money back out.

My Duplex I own I bought for $230,000. It appraised at $220,000 but I was willing to pay a bit more to make it work as the cash flow is good here in Orlando Florida!

I was thinking about putting about $10000 in per side (doing my own work) to do some updating to make the place a little nicer so i can raise the rents (Currently $1050 but i want $1200 eventually).  I also want to try to refinance the place so i can pull out some of my cash to use on future down payments on properties.  

So the main question is what will an appraiser/bank be looking for so that i can refinance at the highest value and get my cash back out of this place?  Im hoping i can get the value of the property upwards of 240-260k and pull out some of that equity for future down payments. 

*What are the hot items I should renovate to make the place worth more? 

*Is my plan to reno, reappraise, and refinance going to work? will banks be willing to give me 100% value refinance or do i have to settle for 70%

Any advice would be greatly appreciated as i'm still so early in my career trying to figure this stuff out.

Thanks

-Benjamin DuPont

You can cash out 70% of appraisal value or purchase price which ever is less under delayed financing exception before 6 month.

You can cash out 70% of appraisal value after 6 month. 

@Benjamin DuPont If you want to force appreciation quickly by renovating I would advise on focusing the remodel of the Kitchens and Bathrooms first. These are huge items appraisers look for. I am no appraiser but a close friend of mine is and he told me that for the same situation for my duplex. 

Hi @Benjamin DuPont - This really depends on your long term goals. Do you want to have more rentals or just keep this one and make it really nice? The reality is that if you've already got an appraisal for $10k less than you paid, you're starting in a hole that will be tough to dig out of. Great renovations often provide returns of 75%, which means it's highly unlikely that you'd be creating additional equity, especially if you hire the work out. If the place is in good shape, but needs aesthetic upgrades, you might just sit with it for awhile and see how you feel about it in a few months. $20k is a lot to invest in hopes of creating $300 per month in additional cash flow. In general, I try to not tie any cash up unless I am certain I can pull it back out in six months at the most. What you are proposing makes me think that cash will be tied up in that property for a long time.

Just a thought- have you considered taking your $20k and using that as a down payment on another property? I don't know what rents and purchase prices are like in your area, but if you could spend $20k on another property that would cash flow that $300 that you are looking for, your passive income would be the same, but now you are appreciating two properties instead of one. Just food for thought.

Best of luck!

@Benjamin DuPont I would say that Step 1 is looking at your neighborhood, recent sales, and determining what the price ceiling is for the area.  And, more specifically, look at the comps your appraiser used to come up with the $220K number.  Odds are that one of them will be higher.  What does the higher one have?  A fancy kitchen?  Is it 200 more sq ft?  Is the lot twice the size?  I don't know the answer to any of that but there are (obviously) some things you can change about your property (a kitchen) and some things that you can't change (lot size).  

Then I'd say that Step 2 is figured out what units are like that are renting for $1200 in your area.  Is it solely based on a better kitchen?  Or do those units have an extra bedroom?  A garage?  200 more square feet?  One of the things that I always have to guard against then looking at renovations is substituting what I would pay for in my personal home vs. what a renter will pay another $50, $100, etc. per month for.  Sure, I'd like Viking/Wolf instead of GE Profile and I'd probably pay for it.  However, in a lot of markets you won't get more rent because of stainless steel appliances.  You might rent the unit quicker, lower turnaround time, etc. (which has economic value) but it may not change the rent ceiling for the area.

As for using 100% of the appraised value in the refinance, you'd want to talk to your lenders.  Odds are there are some seasoning periods involved (6 or 12 months).  I have no idea when you bought it or how long your renovation timeline would be but it shouldn't take more that a couple of phone calls for you to figure it out.

What you might not be thinking about is that during the renovation timeline (which will be longer if it's DIY) you're missing out on rent.  So if you're doing both sides of the duplex and it takes you 3 months that's $6K+ in gross rents that just vanish.  Consequently, if you got your $150/month per side it's going to take you 10 months of those rent increases just to break-even on lost rental income.  And if you have to invest $20K to get that increase it's another 5.5 years to break even.  

So it's basically 6.5 years before you get a positive ROI on your investment. That's not the end of the world if you *have* to do the work (like replacing a roof) but it's a darn long time for *optional* upgrades.

My two cents...  

Great answer from @Andrew Johnson . The appraiser will look at comps - you have an appraisal, check what the appraisal's comps have that you don't have. As to higher rents, you have to look at the local market to see what is out there near to your property and similar in other regards - because that is what a tenant will be doing. And from that, you can see whether a higher rent is realistic.

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