Live-in Flip & Cash-out refinance

[Heeyeon Chung]

Hi BP!

I am curious to know if anyone has done cash-out refinance after live-in flip of their primary residence. I see many successful stories of live-in flips and selling them, but I want to know if cash-out refinance can be a viable option. 

I am eyeing on a property to use it as a primary residence, but it needs upgrades and improvements. My plan is to buy it with VA loan, upgrade it, get a new appraisal, and refinance it after taking cash out using VA cash-out refinance.

Please let me know what your thoughts are! Thank you! 

[Leo R.]

@Heeyeon Chung it sounds like a decent plan to me, but as always, the devil's in the details.

As you probably know, rates are rising, and will likely continue to increase in the near term...what will rates be like when you go to refi this property? (nobody knows!), but if rates are much higher when you go to refi, it could make refi'ing less desirable, or even impossible....

Another variable to consider: values may flatten or even decrease in the foreseeable future (most markets have already seen big increases in inventory, days on market, and price reductions).  If there's a market downturn, and the comps for your refi appraisal are lower than the comps are today, that could make it more difficult for your property to appraise for the value you need for the refi, and might make refi'ing impossible (or less desirable)....   but, just like the issue of rates, nobody knows what the future will bring...

Do these hypothetical outcomes mean you shouldn't buy the house? Not necessarily--the house could still be a great opportunity, even if these outcomes occur...

The question is: what's the worst case scenario for you if you're not able to do your cashout refi?  ...if the worst case scenario is that you just keep living there, and you like living there (and you can afford living there), then that sounds pretty good...  But, if you absolutely need to refi in the future, then you could run into trouble if the aforementioned scenarios occur....  

In other words, it all depends on what your plans and goals are for the future, and how important refi'ing in the future is to you...

Other issues to consider:

-how much opportunity is there to force appreciation on this property? (some properties have a TON of potential where it's very easy to force appreciation by doing things like adding bathrooms/bedrooms, etc....other properties not so much...)....finding ways to force appreciation is one of my favorite things in real estate; I could write a book on this topic!

-how tolerant are you of living in a construction zone (at least for a while)? Some people have no problem living in a house where the floor is bare plywood because they're re-tiling, and there are tools and materials lying around everywhere....other people can't stand that stuff...  with a live-in flip, you'll encounter those types of issues....

-If you plan to do much of the work yourself, it's worth being honest with yourself about whether or not you enjoy that type of work (if you enjoy rehabbing houses, great!).

Would this be your first property, or have you had others?