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

[Samuel W.]

Hi All! (Reposting also in this forum as I'm not sure the right category)

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!!

[Andrew Garcia]

Hi @Samuel W., how much are you putting down on the current loan?

That will really determine whether it is even worth it to refinance year one.

[Samuel W.]

Hi,

25% down. Thanks 

[Samuel W.]

Quote from @Andrew Garcia:

Hi @Samuel W., how much are you putting down on the current loan?

That will really determine whether it is even worth it to refinance year one.

Hi, I’m putting 25% down. ~$262,500

[Andrew Garcia]

@Samuel W., most DSCR programs limit you at a 75% LTV. Therefore, you can take out about $240,000. However, after factoring in the renovation expenses, closing costs, discount point, and pre-payment penalty, it will likely be closer to $160,000 that you get out.

Assuming a 7% rate, your monthly payment would increase by about $1,600.

Which is more important to you $1,600 per month in cash flow or $160,000 to reinvest somewhere else?

I love getting paid for doing refinances as much as the next guy but sometimes they do not make sense.

RSUs cannot be considered as income for conventional financing so it will be tough finding better options than a DSCR.

You could try doing a net rent loan where they underwrite your file as if it were conventional but the rental income is calculated based on the lease agreement or AirBnB payouts for STRs. 

However, you typically need 12 months of rental history to use this product.

The advantage of this is that the rate is about .5% lower than DSCR.

If you want to use this program and avoid the prepayment penalty, waiting a year could be a good option.

Hope this helps! Let me know if I can be of any assistance.

[Samuel W.]

Quote from @Andrew Garcia:

@Samuel W., most DSCR programs limit you at a 75% LTV. Therefore, you can take out about $240,000. However, after factoring in the renovation expenses, closing costs, discount point, and pre-payment penalty, it will likely be closer to $160,000 that you get out.

Assuming a 7% rate, your monthly payment would increase by about $1,600.

Which is more important to you $1,600 per month in cash flow or $160,000 to reinvest somewhere else?

I love getting paid for doing refinances as much as the next guy but sometimes they do not make sense.

RSUs cannot be considered as income for conventional financing so it will be tough finding better options than a DSCR.

You could try doing a net rent loan where they underwrite your file as if it were conventional but the rental income is calculated based on the lease agreement or AirBnB payouts for STRs. 

However, you typically need 12 months of rental history to use this product.

The advantage of this is that the rate is about .5% lower than DSCR.

If you want to use this program and avoid the prepayment penalty, waiting a year could be a good option.

Hope this helps! Let me know if I can be of any assistance.

Thanks, cash flow is not a concern. We purchased the property for long term appreciation and tax benefits. Current rate for loan is already 7.25%. My priority is the cash out as I have another deal planned in Sept. 

[Andrew Garcia]

@Samuel W., I see. DSCR would be your best option for a cash-out in that case.

[Raymond J. Rodrigues]

I've personally seen DSCR loans with as high as 85% LTV on purchases and 80% on cash out.

[Katrina P.]

@Samuel W. Following this thread, as I am interested in doing the same thing. If your LTV can only be 75% of ARV (1.32M) which equals $990k, your max cash out will be around $202k, which leaves $60k still in the deal, correct? Just making sure I'm following you.

[Ricardo S.]

@Samuel W.

The new (to me Atleast) loan product on the block is

40 year fixed loans , first 10 years are interest only payments. Cash out refi at 80 LTV as long as your DSCR works. They require a 6 month seasoning.

Based on how the market is going I would Personally pay the point and refi to get as much capital back as you can. That point will be a tax deductible expense anyway.

Good luck

[Justin Konz]

@Samuel W. Cash-out rental loan based on AirDNA projected rents would work well. You could get up to 75% of the appraised value.

[Stephanie P.]

@Samuel W.

You'll have to have 12 months of AirBnB data to use that as a rental amount or you'll be forced to use the lower of the lease amount or the number on the appraisal, so renovating and rehoming the current tenants would be the smartest thing in my opinion.  Definitely only have a 1 year prepay so you can refinance into a longer term vehicle and I do like the interest only 40 year options on these.  If cash flow is your goal, that would be the best way to go.

All the best

Stephanie