Well...at least we hit the budget
If we had finished this rehab 60 days ago, I would be in a much better spot today.
It's a duplex. We bought it with cash this year, $228,750 at closing (I had to cover the buyer's agent commission in my offer too), and budgeted $100,000 for the rehab. We came in at $96,000.
It's about 95% done. Finishing touches next week, then we list it for rent and start the refinance.
On budget. Nothing blew up, and it still sucks...
When I bought it, I penciled the refinance at 6.25% to 6.5%. About 60 days ago I still felt good about that. Today I'd be lucky to get 7.25% to 7.5%, and if I don't hurry up it could creep toward 8%. Who knows. Nobody does.
Same house. Same rehab. Same budget. The only thing that changed is the calendar.
So before I tear down anybody else's deal on October 21st, I figured I should tear down one of my own.
The three clocks
I'm keeping this deal, no matter what. That was always the plan. The only question is how much of my own money stays in it after the refinance.
That comes down to three things, and none of them are fully in my control:
- The rate. Higher rate, bigger payment, smaller loan (because of DSCR).
- What it appraises for. A cash-out refi on an investment property usually caps you around 75% of the appraised value.
- What the appraiser says it rents for. This is the one people forget. Most lenders use the appraiser's market rent to decide whether the rent covers the payment, even if you have a signed lease. On a DSCR loan, that number decides your loan size as much as the value does, and it's sometimes a big surprise to investors.
When I bought it, $3,000 a month total for renting both units made sense. Today I'd be happy with $2,750. I could still get $3,000...it just depends on what the appraiser writes down.
Rents here in Austin, Texas have been sliding slowly for about six months. Part of it is there's still a lot of multifamily inventory sitting out there. The other part I didn't see coming: sellers who can't sell are delisting and putting their houses up for rent instead. If you're a renter in Austin right now, it's an amazing time to be one. If you're a landlord, less so.
What it actually looks like
Same numbers, for anybody whose screen hides images:
- 6.4% (60 days ago): about $11K of my cash left in, at $3,000 or $2,750 rent
- 7.4% (today): about $11K left in at $3,000 rent. About $40K at $2,750
- 8.0% (if I wait): about $23K left in at $3,000 rent. About $56K at $2,750
(Example numbers: $425K appraisal, cash-out refi at 75%, 30-year fixed, rent has to cover the payment, taxes $6,000 a year, insurance $250 a month, and about 1.5% in refi costs.)
A couple things jumped out at me when I ran this.
If the units appraise at $3,000, the rate jump so far costs me basically nothing. The appraised value is what limits the loan, not the rent. If they appraise at $2,750, the exact same rate jump costs me about $29,000.
Same deal. Same rate. The appraiser's rent number is a $29,000 swing.
Want to know what's really making me nervous? What if it appraises at $400,000 instead of $425,000, because houses are sitting and selling for less as rates go up? Then even the best case goes from about $11K left in to about $29K. Roughly $18,000 more of my cash for a $25,000 lower appraisal.
"But Tarl, you just said you're keeping it anyway...."
I am. It's still a good deal for me right now, and I'm thinking long term here.
What I'm doing about it
- Appraising right away. Not because I'm sure values are dropping. Because I'm not sure they aren't, and the appraisal sets both numbers.
- Locking the rate as soon as the numbers work. I'm not betting on rates coming back down soon. I could be wrong. I'm just not betting on it.
- Finishing. (I still don't know why the last 5% is always the hardest part.) Every week this sits unfinished, all three clocks keep running.
If we had finished 60 days ago, the rate jump wouldn't matter on this one at all.
The Deal Teardown: Wednesday, October 21st
Announcing our first ever "Deal Teardown" live. I will be breaking down and analyzing real problem deals presented by other investors, live on the show. It's going to be direct, honest, and hopefully help some people out. Join me live Oct 21st.
The first one is Wednesday, October 21st, on Zoom. Register here
If you have a deal you want me to look at live, email me what you've got going on.
Good luck, it's that sort of market right now.
Tarl Yarber
(Once again, I personally write these...)
PS: Need funding? If you have something wrapping up and you're watching the same clocks I am, we are actively lending on single family deals, hard money, DSCR loans, plus small multifamily, in 40 plus states. Go to www.fixatedfunding.com, or just email me and it comes straight to me.
