Does rental income affect appraisal value of a property?

Question

Hello all,

I am in the process of refinancing the duplex that I am house-hacking, with the main goal being a cash out refinance. I have significantly increased the rent compared to what the property was renting for when I purchased. The lender I am working with claims that the new rent amount will not affect the appraised value, so it will not appraise much higher than when I purchased.

Is this correct? I was under the impression that the value of the asset would increase if the rent increased.

Thank you in advance!

Dan H. · Answer

So there are a lot of lender who acquire loans and therefore you can find a variety of loan criteria when the lender is planning on keeping the loan in house.

Fannie/Freddie (F/F) have similar criteria to each other.  Their lending criteria  is not always followed precisely.  F/F indicates that homes with 4 units and less are appraised on comps.  Most appraisals will include a rent based evaluation that is NOT used in the appraisal for the loan but there just as a comparison.  In your case the value should be set on sold comps.

If you had 5+ units, the value is based on NOI and cap rate.  NOI is a function of rent and expenses.

In general, your lender's comment is true.  You can actively look for lenders that will lend with different criteria.  These loans often have a slightly higher interest rate.

I have heard about loans

• Based on income/rent
• Most are appraised on the lower of purchase or appraisal, but I have heard of some that are solely based on the appraisal.

Good luck

Steven Foster Wilson · Answer

Haters are gonna say its fake. But I refinanced 2 duplexes here in Columbus OH, and both times I made sure I increased the rent to the max potential. I walked with the appraiser and he told me that more income allows for a higher evaluation. However other factors like comparable sales, and size will determine a limit.

Dan H. · Answer

It certainly helps, doesn't it :=).  I am not sure I would go as far as saying all.  We have purchased some at retail with value adds that I would classify great transactions.  I would think the inverse is always true.  A great purchase price always produces a great real estate transaction.

Steven Foster Wilson · Answer

Great point Dan. A great BRRRR starts with a good purchase price, as does all great Realestate transactions!

Dan H. · Answer

We mostly do value adds (a couple of the value adds have not been rehabs) and mostly BRRRRs and we refinance meeting F/F criteria (i.e. from comps).  We are relying on our property condition to comp against nicer properties for our higher appraised value.  I will state that I believe it is very challenging using this approach that if you paid market value to be able to extract all of the investment.  It works best if you have purchased below market value and therefore already have some equity in excess of the money invested.  So you are obtaining the value as accessed by the rehab as well as value that was present at purchase.

Note, even if you do not extract all of your investment, if you are into an investment at <10% of ARV having added significant equity, that is still a win.

Here is a hypothetical case using easy to manage numbers (definitely not real numbers in my market): $100K to purchase but worth $110K, $10K to rehab to increase value $20K (our goal is to always have at least 100% expected return on the rehab budget otherwise it is not worth the effort).  It now appraises at $130K.  LTV 75% of $130K = $97.5K.  There is still trapped $12.5K (<10% of ARV), but there has been $20K of unrealized return (still trapped in the property).  It was not a perfect BRRRR as not all money was extracted but you have a $130K asset for $12.5K and $20K of unrealized return.  In our market the cost to purchase is ~5x to 7x the example, cost to rehab is up to 2.5X per unit but the increased value is at least the same multiplier (I believe we have always been at least $50K value over cost).

I suspect if the newby is searching for a BRRRR that has a good chance of being able to extract all of their investment, they may be searching for a long time in many markets.

Note we have done quite a few BRRRR and, in our market. I am not expecting to be able to extract all of our investment via a BRRRR (unless we start with a property that is at least 15% below market value or get a help from appreciation).  I am expecting to have <10% of ARV trapped and $50K+ of value (above cost) gained.

I should add that we have extracted all of our investment from every property that has not been acquired in the last 2 months.  A minority of the properties this was achieved solely via BRRRR.  Each property had a big assist from property appreciation.

Good luck

Gregory Doyle · Answer

@Steven Wilson Thank you!

Steven Foster Wilson · Answer

@Gregory Doyle local credit unions / banks seem to be the best, not all of them do it, but some do. You can also call Global Integrity Finance, their a Hard Money Lender so rates are like 5% but they can pretty much do anything

Gregory Doyle · Answer

@Dan Heuschele Thank you for the info! I wasn't aware that NOI/cap was considered primarily for commercial-sized MF properties, I assumed that it would be relevant for any income producing asset. When someone uses the BRRRR strategy for a single family home, isn't rent a major factor in getting the home to appraise for a higher value? Or are they refinancing with a portfolio lender in order to make the rent relevant to the value?

@Steven Wilson do you have any advice on finding a good portfolio lender? I'm in Richmond, VA, and I can do a search for local portfolio lenders but maybe there are lenders you would suggest?

Steven Foster Wilson · Answer

You can refinance a property as soon as you close, but they will use the same appraised value as your purchase. If you want to refinance based on a new appraised value, you’ll need to wait 12 months according to Fannie and Freddie. You might be able to go to a portfolio lender who can make their own rules.

Gregory Doyle · Answer

@Brad Hammond @Steven Wilson Thank you both for your responses. Brad, when you say it depends on what type of loan, do you mean refinancing into a conventional vs. fha for example? Or are there other types of loans that would make more sense to refinance with? I'm open to other types of creative financing, just not sure what is available/what to ask for.

I was told by another lender that I can't cash out refinance until exactly one year after original purchase date, but I thought it was 6 months. Each lender has a different answer so far!

Does rental income affect appraisal value of a property?

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