Renovating to Refinance (My new Duplex)

[Benjamin DuPont]

Hey everyone!

I am trying to figure out how best to renovate my property for the best options of refinancing and getting money back out.

My Duplex I own I bought for $230,000. It appraised at $220,000 but I was willing to pay a bit more to make it work as the cash flow is good here in Orlando Florida!

I was thinking about putting about $10000 in per side (doing my own work) to do some updating to make the place a little nicer so i can raise the rents (Currently $1050 but i want $1200 eventually).  I also want to try to refinance the place so i can pull out some of my cash to use on future down payments on properties.  

So the main question is what will an appraiser/bank be looking for so that i can refinance at the highest value and get my cash back out of this place?  Im hoping i can get the value of the property upwards of 240-260k and pull out some of that equity for future down payments. 

*What are the hot items I should renovate to make the place worth more? 

*Is my plan to reno, reappraise, and refinance going to work? will banks be willing to give me 100% value refinance or do i have to settle for 70%

Any advice would be greatly appreciated as i'm still so early in my career trying to figure this stuff out.

Thanks

-Benjamin DuPont

[Andrew Johnson]

@Benjamin DuPont I would say that Step 1 is looking at your neighborhood, recent sales, and determining what the price ceiling is for the area.  And, more specifically, look at the comps your appraiser used to come up with the $220K number.  Odds are that one of them will be higher.  What does the higher one have?  A fancy kitchen?  Is it 200 more sq ft?  Is the lot twice the size?  I don't know the answer to any of that but there are (obviously) some things you can change about your property (a kitchen) and some things that you can't change (lot size).  

Then I'd say that Step 2 is figured out what units are like that are renting for $1200 in your area.  Is it solely based on a better kitchen?  Or do those units have an extra bedroom?  A garage?  200 more square feet?  One of the things that I always have to guard against then looking at renovations is substituting what I would pay for in my personal home vs. what a renter will pay another $50, $100, etc. per month for.  Sure, I'd like Viking/Wolf instead of GE Profile and I'd probably pay for it.  However, in a lot of markets you won't get more rent because of stainless steel appliances.  You might rent the unit quicker, lower turnaround time, etc. (which has economic value) but it may not change the rent ceiling for the area.

As for using 100% of the appraised value in the refinance, you'd want to talk to your lenders.  Odds are there are some seasoning periods involved (6 or 12 months).  I have no idea when you bought it or how long your renovation timeline would be but it shouldn't take more that a couple of phone calls for you to figure it out.

What you might not be thinking about is that during the renovation timeline (which will be longer if it's DIY) you're missing out on rent.  So if you're doing both sides of the duplex and it takes you 3 months that's $6K+ in gross rents that just vanish.  Consequently, if you got your $150/month per side it's going to take you 10 months of those rent increases just to break-even on lost rental income.  And if you have to invest $20K to get that increase it's another 5.5 years to break even.  

So it's basically 6.5 years before you get a positive ROI on your investment. That's not the end of the world if you *have* to do the work (like replacing a roof) but it's a darn long time for *optional* upgrades.

My two cents...