Valuing a cash deal then refi versus an upfront financed one

[Frank VanAusdal]

Hi all:

Longtime lurker; first time poster

This will be my first deal! I am assessing a deal for a 2 unit building. A commercial space on the bottom and residential on top. I am confident of improvement costs and my eventual cash flow.

Regarding assessing the value of the deal. Normally, I would simply divide my cash flow (which includes mortgage payments) by the down payment to get a return. However, because of the condition of the building and the better deal I can get I plan on buying the property cash then improving it and then refinancing to get most of my cash back.

My question is going all cash and planning on a refinance after reno is riskier than mortgaging upfront and only risking your down payment. How do I calculate this risk?

• (1) What are some risks to my cash that is tied up before I refinance?
• (2) What is the risk premium I should assume for this cash?
• (3) How should I measure the opportunity cost of my money tied up? E.g. compare it to S&P 500 returns?
• (4) How can you estimate what the bank will appraise the property for during the refinance post improvements? Is it as simple as looking at comps?
• (5) Any other tips, watch outs or suggestions would be very much appreciated.

Cheers