Question about increasing rent & refinancing a duplex

[Greg Larson]

Hey BP,

I'm considering pulling the trigger on a duplex in my area that's currently renting for $700/side. I believe it can rent for $1100/side and my agent thinks it could go for up to $1300/side.

If I paid $280k for it and then took the rents from $700/side to $1200/side, then refinanced it, do you think it would raise the property value all that much?

The cash flow at $1200/mo would be good, but I'm trying to see if there's a bigger play here where I could refi and leverage this duplex into a 5+ unit deal after just one year

(My loan for this property would be an FHA with 3.5% down)

Thanks in advance for your advice!

[Andrew Moore]

If you are looking at being able to increase rents without doing any work I would say there is a pretty good chance you are at market value currently, so refinancing with a higher value wouldn't be likely. "Market Value" was mentioned a few times above, and they are spot on. Your rents aren't going to impact the value of a property like this in the eyes of the appraiser. When they do a refinance (or sale) the bank will order an appraisal to determine market value, and they will only look at recent comparable sales in the area to determine that value. 

You can get a rough idea of "ARV" by looking at places that recently sold if you have access to a database of that kind of info (Zillow, Realtor.com, An agent specific site). The quicker more efficient route to stay up to date on something like that, would be to form a relationship with a local realtor to keep you updated on value from time to time. Some lenders will send out values based on various algorithms as well which will get you close.

I would look to see what kind of finishes and condition that other properties in this area might have that are drawing like $1,700 in rent. This might give you some clarity on if there is an opportunity to add value and refinance, or if going any nicer on finishes or higher rents would price you out of the market in that area. 

Hopefully this brings some clarity to some of the things previously mentioned!