ARV to Refinance Rental Property

[Anthony Winston III]

So I am finding out more and more that getting good deals alone isn't working out. I just don't have the cash available for a downpayment AND renovation costs. No I am looking into hard money. Let's say in a perfect world, I find a hard money lender that lends me a large percentage of the purchase price and renovation. Once the deal goes through and I refinance, how do I determine the ARV to ensure it's a good time to refinance with a conventional loan and pay back my hard money lender?

I understand how to calculate cap rate and cash-on-cash so my offer price is based on those numbers. Once the rehab is completed, the rents I receive were already considered when setting the purchase price. Do I have to wait a year or 2 when rents are increased to make the ARV higher in order to make refinancing worthwhile? I'm really trying to BRRR method work for me.

[Nghi Le]

If you are brand new, the highest leverage from a HML I can think of is 90% of both your purchase price and rehab. So you'll have to come out of pocket 10% of the total costs. HML may require you to show more than that in reserves though.

Your ARV should be determined before you purchase the property, not at the time of the refinance. You find the ARV by doing comps of similar properties that have the same type of work and finishes as your property. This would also help you determine what kind of work you need to do on your property and how much you should be spending on your rehab. For SFR and 2-4 unit properties, it's comps that determine ARV, not rents.

You should look to refinance out of the hard money loan as soon as you can. You can refinance anytime if you're just paying off your HML, or after 6 months if you're looking to do cash-out.

If you're looking to do BRRRR, you should connect with a loan officer first to discuss conditions of the refinance and what amount you'd qualify for. Then search for a hard money lender, then search for the deal. Get your exit strategy and financing in place before putting yourself in a deal.