Is This Creative 0 Down Payment Strategy Possible?

[Wilson Vanhook]

Help me figure out if this scenario I thought up has potential to work or not.

First Leg:

Purchase Price: $500k

Down Payment: $100k

Closing Costs: $20k

Let's say I want to purchase a short term rental at the price point of $500k. First leg, I do my 20% down DSCR (no prepay penalties) and close like normal on the property. That means I brought $100k as my down payment and paid about $20k in closing costs, so I'm all in for $120k out of pocket and my loan note is for $400k.

Second Leg:

Loan Note: $400k

Cash Out Refi Amount Request: $500k

Closing Costs: $10k

Now for the second leg here, let's say almost immediately after closing within a month or so, I want to do a cash out refinance to pull my entire down payment out. I put in the request to refi the loan at $500k, meaning for an LTV of 80% I need the appraisal to come in at $625k. In this scenario if I can get the appraisal to come in where I want it and actually refi at $500k, the only costs I ate to acquire the property were the total $30k in closing costs. Now I hold and rent out as a short term rental.

For clarity this is not a rehab project, this would be me just trying to refi without adding value. This may sound crazy, but I own another STR in this particular market, and the reason I think this might actually be possible in based on the value of my other similar property. I own a 1 bedroom cabin worth $615k on paper and it's only 900 sqft. This new cabin I want to acquire is also a 1 bedroom but is 1350 sqft. So I really feel like it could appraise for $625k after closing the first leg and trying to do a refi. The risk here is what if I can't pull my money back out and don't get to cash out refi the amount I want. I think the gap in my knowledge here comes down to how appraisals work? Does anybody know how they get their appraisal number? Will they look at what I just purchased it at for $500k and be like no way we aren't appraising this for $625k a month later? Or will they see my newly requested loan amount for $500k and be like okay we will try to appraise it at $625k to cover this loan? Or do they actually do it the right way and pull nearby comps? What if they pull comps and they appraise it low, then I show them what my other smaller property is worth on paper? Can I ever communicate with them? So many questions on the appraisal side I really just don't know how that works. I feel like for new purchases they are typically generous and try to make sure people can purchase the property they want to. But this is a little different that a new purchase.

[Josh C.]

The first comp all appraisers pull is yours, the house they are appraising. They will see it sold for 500k with all the pictures online, and appraise it for 500k. Also, the second lender will see you just bought the property weeks ago and ask why the value has went up 20% instantly. I give this plan a 1% of success.

A better plan would be buy it for 500k, fix the kitchen/baths and paint the exterior/interior and then try the refi about 8 months later. People have been doing this forever and proven to work.

Good luck!