Value added refinance?

Question

Thinking of purchasing a home to live in and rehab, add some sq ft via basement. I then want to refi at a higher price and hopefully regain some capital from down payment/ rehab. Is this something that is possible? Similar to the BRRRR but not the rent part. Do you need the rent to gain on the appraisal or is value added in rehab/ and sq ft enough to change the appraisal?

Erik Manley · Answer

Will, I'm also in CT (Stratford) and this strategy is exactly what I did on my first property using a 203k loan. After finding a property that you can increase the equity on through a rehab, you can get a 2nd lien heloc on the property and since it's in CT, you can go up to 100% LTV through Nutmeg State Financial Credit Union. Megan Mofitt is the Senior HELOC loan officer there and I can give you her information if needed, since most of the tellers in the branches aren't aware of the special 100% LTV program for an extra 1.5% above prime. The best part is with doing it the heloc route, you don't pay any closing costs and the appraisal is covered by the lender(Only have to pay it back if you close out the heloc within the first 2 years).

As for finishing a basement in CT that can be a major value add if you can increase the SQFT AND OR ADD BEDROOMS to the property LEGALLY. That means at least 7 ft ceilings, egress windows for bedrooms, and just be weary of properties in flood zones.

I'm a lender and have multiple duplexes in Stratford and have done 203k loans, a flip and two new construction townhouse style duplexes (All in floodzones) and have many friends who have done basement renovations.

I host a monthly meetup that's meeting tonight at Bad Son's brewery tonight at 6pm in Derby if you want to stop by, or message me and give me a call and I'd be more than happy to walk you through it.

Good Luck!

Michael Dumler · Answer

@William Acker, so long as there is enough equity spread on the appraisal after repairs then there's nothing wrong with this strategy. The rent aspect is not necessary for an appraisal for a conventional refinance. I would advise that you have a firm understanding of the rehab process and ARV, especially for basement conversions. Does this add significant value to your market? With uncertain future market conditions, it's even more important to run your numbers religiously. Keep in mind, you're essentially going to have two separate closings with two separate closing costs respectively. One for the home purchase and then another closing for the refinance. Make sure to account for escrow and appraisal fees. What market are you in?

Jaron Walling · Answer

@William Acker Yes you need a rehab to bump appraised value. That's important given what you described. I call it BRRRR-ish.

I used this strategy when I purchased my first home. You make your money when you buy. You can't pay full market value and expect it to play out. Your market research needs to give an idea for "how much" to spend. Buy something under market, rehab/value add, and then drag the appraised value up. From my experience what a lender thinks a property is worth is generally lower than market value. Market values have dipped nation wide. Run conservative numbers otherwise you'll trap more $$$ into the property, and/or won't cash-flow as rental if that's a long term plan.

Jonathan R McLaughlin · Answer

careful, if the basement can't be listed as legal living space, which many can't because of window's, height, etc. the appraisal value may be minimal at best. And you may get a "playroom" style bump rather than an added bedroom. Check your codes. This partially accounts for why basement renos are one of the least efficient value adds.

Nicholas L. · Answer

@William Acker

we don't have a lot of details here but this probably won't work.  it seems to me that if you buy with a loan it's just very unlikely that you'll be able to boost the ARV just with the basement enough to justify refinancing.

loans are expensive.   you pay to get them.  if you have to close twice that is a non-trivial cost.  and the market is not likely to just float up in a few months either.

with all of that said, you can absolutely do a live in BRRRR like @Jaron Walling mentioned.

but you really have to boost the ARV or it's just not worth it.  I'm talking >2x what you paid for the property.

Bob Stevens · Answer

Of course, whenever you improve a property it will add value, just know your numbers

All the best

Ash Hegde · Answer

Rehabbing a property can get you a higher appraisal even if it's for a primary residence. The difference being that you'll need to support the loan with personal income rather than rents in this case.

If you want a low down payment option for this, look into an FHA 203k loan. You can get in as low as 3.5% of the ARV. There's additional paperwork and managing contractor work and draws so it can be a bit of a pain though!

Jaron Walling · Answer

@William Acker Have you walked any properties or made any offers? What numbers you seeing? Prices have dipped everywhere. It's a good time to find/buy/create deals.

We can't give concrete advice without real numbers like PP, estimated rehab, ARV, market rents, or COC. Investors need a general understanding of these numbers before they buy, and every neighborhood is different. This is investing. The mindset is different. It's a stepping stone to the next opportunity.

Value added refinance?

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