Cash out Refi before or after remodel?

Question

I own a property that is 2 houses on 1 lot. My family lives in 1 and I finished rehabbing the rental in the first 6 months and have been renting it out while rehabbing the 2nd. I plan to completely overhaul the kitchen with new cabinets and appliances because at this point it is livable but not rentable (if that makes sense).

My question is: I want to refinance in order to pay for the remodel but should I max out credit cards to pay for the initial costs and then refinance? or should I refinance now and use the cash out to pay for the remodel after?

My thinking is that the property would appraise for more after the remodel and I would get more money from the cash-out. Am I thinking about this correctly? or is there something I'm missing? Is this even an option or am I overthinking it? Thanks

Harjeet Bhatti · Answer

Can you get HELOC for this property?  HELOC will be good option for two reasons:- your credit won't be effective by one credit inquiry, 2nd credit cards higher limits will lower your credit score.

Zachery Buffin · Answer

I missed the bit about the maxing out of credit cards, what you might do instead of that is go to a bank, more than one, to compare them. When you are there explain what it is you want to do, explain that you do this as a profession and that you want to build a banking relationship that could result in a lot of assets being represented by a bank.

This may open you up to a line of credit, a home repair loan, or some other option that has much lower interest rates than credit cards and is secured debt which shows up as different than unsecured (credit cards) debt on a credit inquiry.

If there is no other option credit cards can work but that is a steep price to pay if you don't have to.

Matt K. · Answer

Might want to check with a loan officer before you go maxing out credit cards..... it could stop you from doing the refi.

John Leavelle · Answer

Howdy @Richard Canchola

Definitely Refi after the full Rehab is completed.  You will also want to check with the lender on any seasoning requirements they may have.  Assuming you plan on moving out of the 2nd house once the Rehab is finished in order to make it a rental.  You may need to have it occupied (rented) for 6 months before you can Refi.

I also agree with being careful maxing out your credit cards.  That can have an impact on your credit rating and DTI ratio that the lender will be looking at.  @Matt K. is right you need to work with a lender so they are aware of your plan and to get pre-approved.   I use both Home Depot and Lowe's credit cards for Rehab's.  I also have a HELOC and a Line of Credit to use.  I typically payoff the CC's with the loans when I get the bills.  They have a much lower interest rate and paying off the CC's help keep my Credit Score high.  The Refi is then used to pay off my Private lender and my personal loans.

Zachery Buffin · Answer

The appraisal value will be lower on the refi before the rehab, the idea of a BRRRR is that you are going to get more money out than you put in. Every dollar of the rehab should earn at least $1.01 ( obviously this is a logical minimum to get the value)

If you appraise it before the rehab for the refi you are leaving money on the table and tied up in the property that can only be pulled out with another refi is a waste of time and effort.

Matt K. · Answer

It has to do with seasoning... which basically is used to reduce the risk to the bank. If you buy a house cash, you don't have seasoning (6-12mo) and can pull your money out UP TO 80% the appraised value. Now if you didn't buy it cash (like the OP) you'd have to wait 6-12 months before you could use the NEW appraised value. The bank will let you pull out up to 80% of your purchase price + repairs if you made any. This doesn't work well for a investor because you assume you made repairs to increase value and will get a return greater than what you paid. Also if you bought say 20% under appraisal or your house has risen quite a bit... you're stuck.

The renter part might have seasoning requirements to in order to make sure you have a credible tennant. They sometimes require x amount of time before they count % of your rent as income (to account for vacancy etc). This is separate from the house seasoning, but still plays a part of getting a loan...Lastly, if you use a HELOC or otherwise get a abnormally large deposit in your account.... you can usually wait a few (2-3) months for your funds to season. The banks will usually ask for your recent 2-3 months of bank statements again as a way of making sure your deposits are seasoned. If the deposit is too odd you might have to write a letter about it... but that's another topic.TL;DR: Seasoning prevents you from taking out more money then your homes worth and foreclosing. Also reduces their risk towards fake leases and deposits from being counted...

Jacob Barnhart · Answer

So I have a question. Why is the "renting" necessary for the refinance? I've seen it implied many times that the house must be rented for a certain period before a bank will consider refinancing, but I've never read an explanation.How is it different from me refinancing my primary residence right now without income coming from it?

John Leavelle · Answer

@Richard Canchola

$250K - $300K ARV?  You already have a problem getting all your cash out.  The Refinance loan for this type of property will be 70 - 80% LTV (typically 75%) based on a current appraisal.  At 75% that means a loan amount of $187.5K to $225K.  Your costs are up to $230K.  Did you finance the purchase or pay cash?

Richard Canchola · Answer

thanks for all the responses! I was busy moving in more renters!

that was a big concern i had as well.. maxing out credit cards might even prevent me from getting the refi in the first place.

The HELOC was my next option. but I know hardly anything about the product so I didn't want to rush in to something that I'm uneducated about.

a little more about the property: we got keys for 200k and it appraised for 220k at close. we put about 20k in repairs already and hoping to do a 10k kitchen update as well as put some finishing touches on bathrooms. this was a year and a half ago. comps are now showing from 250k-300k. along with the cash out I'm wanting to buy another property.

Cash out Refi before or after remodel?

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