Would You Buy a Deal That Only Works After Refinancing?

Question

A common underwriting trap is treating a future refinance as though it has already happened.

Consider a hypothetical rental that requires $120,000 of total cash for the purchase, renovation, carrying costs, and reserves. The plan assumes the property will be refinanced after stabilization, returning most of that capital. Until then, however, the investor must carry the original loan, complete the renovation, achieve the expected rent, satisfy seasoning requirements, and receive a supportive appraisal.

The refinance may be a reasonable business plan, but it is not a guaranteed event. Rates can move. Appraisals can disappoint. Renovations can run late. Rents can miss the projection. Lenders can change their programs or require more reserves.

When I evaluate this type of deal, I separate two questions:

1. Is the property acceptable if the refinance is delayed by twelve months?

2. Is the investor still financially stable if the refinance returns materially less capital than expected?

If the answer to either question is no, the plan may be relying on financing execution rather than real estate fundamentals. That does not automatically make it a bad deal, but it does mean the margin of safety should be larger.

How do you evaluate a property when the projected return depends heavily on refinancing? What minimum result must the deal produce before the refinance for you to remain comfortable?

Ashish Acharya · Answer

Dan, I agree with the way you’re framing this. A refinance should be treated as an exit from the initial capital structure, not as something the deal is entitled to receive.

The two questions you listed are exactly the right ones, and I’d add a third: what happens to the deal if the refinance does happen, but at a worse LTV, higher rate, or lower appraisal than expected?

That’s where BRRRR deals can get uncomfortable. The property may still be perfectly viable as a rental, but if too much of the return depends on pulling most of the original capital back out, a lower appraisal can leave a lot more cash trapped in the deal than expected.

From the tax side, the refinance itself generally isn’t taxable income because it’s debt proceeds. But the property still needs to stand on its own operationally after the new loan is in place. I’d want the stabilized rent, DSCR, reserves, and post-refi cash flow to work without assuming an aggressive appraisal or perfect refinance terms.

I’d also keep the rehab records detailed. Once the property is placed in service, those costs feed into basis and can support a more accurate cost-seg analysis, but the tax benefit should be treated as upside, not as the thing that rescues weak underwriting.

For me, the minimum result before feeling comfortable is that the deal still works if the refinance is late, smaller, and more expensive than planned.

Happy to connect!

Ken M. · Answer

Refis are expensive and time consuming, buying right the first time is much more beneficial.

Ryan Thomson · Answer

I stress-test every deal against a refi that doesn't happen.

If the property needs the refinance to not bleed cash, I pass. Renovation runs 3 months long, seasoning takes another 6 months - that's a 9-month carry at your original loan terms. Can you survive that without the deal dying? If not, you're betting on execution, not buying real estate fundamentals.

The number I want to see: monthly cash bleed at original terms, multiplied by 18. That's the reserves needed for a worst-case refi delay. If that number isn't in the account after closing costs and renovation, the deal is thinner than it looks on paper.

Where this gets interesting for certain deals: if you're buying FHA or VA inventory with an assumable loan at 2.75-3.25%, you're not underwriting around a future refi at all. The rate is locked at acquisition. No rate risk, no seasoning games, no appraisal dependency. The deal works on day one at the rate you're buying it.

There's decent inventory of those in Colorado right now in the $350-500K range. Not every deal qualifies, but when they're available they remove a whole layer of execution risk from the underwrite.

Dan Handford · Answer

Thanks, Crystal. I like the distinction you draw between a smaller deal where current market activity can help validate the projected value and a larger syndication where the entire return depends on a future refinance. Looking at pending and contingent sales is a practical way to test whether today’s comparable sales are likely to remain relevant six months from now. I also agree that a deal producing acceptable results before refinancing creates a much healthier margin of safety.

Crystal Smith · Answer

Great post that will get people thinking.

How do you evaluate a property when the projected return depends heavily on refinancing?- If it's a small deal and the timeline to refinance is 6 months, then we evaluate the pending and contingent properties on the market to see if the future appraisal value will hold. If  the property is located in an active market and there are quite a few pending or contigent then we consider the risk low.  If there's not pending or contingent data then we may consider the risk high and not pull the trigger.  We usually don't worry about interest rates or reserves.  If we are considering investing in a large deal through syndication and the returns are 100% dependent on refinancing then we pass. If the project provides us with returns that match our goals prior to refiancing then we may putll the trigger and invest.

Igor Ganapolsky · Answer

Dan, your two questions are the right framework for BRRRR and fix-and-flip deals. But there's an acquisition structure that makes the entire refinancing question irrelevant: tax deed auctions.

At a tax deed auction, you pay 100% cash. No hard money, no DSCR loan, no refinance plan. Your winning bid becomes the new assessed value immediately — there's no appraisal uncertainty because you SET the value. If a property is assessed at $400K and you win at $250K, you just created $150K in equity at closing. Not through forced appreciation, not through a future refinance — through the acquisition discount itself.

Ashish's framing — "a refinance should improve an already workable deal, not be the only event preventing a liquidity problem" — is exactly right for traditional acquisitions. But at tax deed auctions, there IS no refinance to worry about. Donyea's approach of "creating deals with the worst case scenario in mind and working backwards" becomes much simpler when your worst case is buying at 70% of assessed value with cash and still clearing your return hurdles.

Shiloh's hard money → refinance strategy works well in the conventional world. But every step in that chain carries execution risk: hard money costs, rehab delays, seasoning requirements, appraisal gaps, rate changes, lender program shifts. At a tax deed auction, you skip all of that. The discount IS the return. You're not engineering equity through a refinance — you're acquiring it at purchase.

I've been working Broward County (Florida) tax deed auctions. Auction #113 in October has 16 properties ranging from $200K-$500K assessed value, with opening bids at $100K-$350K. The spread between assessed value and opening bid is the margin of safety. No refinance needed. No appraisal risk. No seasoning period. Just cash at closing and instant equity.

The tradeoff is you can't inspect inside before bidding, and you need the full purchase price in cash. But if your question is "would I buy a deal that only works after refinancing?" — the tax deed auction answer is "I buy deals that work at purchase because the discount is large enough that no future financing event is required."

Dan Handford · Answer

That is the right stress test, Ashish. A refinance should improve an already workable deal, not be the only event preventing a liquidity problem. I would also separate the property's ability to support the refinance from the investor's ability to carry the project while waiting. Which assumption do you usually see fail first in these deals: stabilized value, completed rent, seasoning, or borrower liquidity?

Donyea Jenkins · Answer

Reading this made my day. Validating some of the upfront work I am doing. I am create my deals with the worst case scenario in mind and then work backwards. I am building a portfolio and selling is the LAST option so I am structuring my strategy with low leverage and High DSCR. I want the property to support itself so that all exit strategies are tools and not relief valves for buying bad. I don't want to build a portfolio where it's possible that the whole thing could come down because the foundation isn't strong.

Appreciate your words and advice.

Shiloh Lundahl · Answer

@Dan Handford this is a great question. I buy properties below the median price point and I buy them with hard money. Then I fix them up to some degree usually and then my goal is to refinance them. I really ever have an issue with refinancing the property unless it's a manufactured home. Then that can be harder.

I have a trick that I've used over last six years in order to make sure that the appraisals come in at value that's like 99% reliable. I made a video about it that I could send you if you want it.

Would You Buy a Deal That Only Works After Refinancing?

Would You Buy a Deal That Only Works After Refinancing?

Most Popular Reply

9 Replies