Simulation: a fictional property for practice.

A BRRRR where the appraisal comes in low

Buy with cash, renovate, rent it, then refinance to get your money back. Then the appraiser says $270,000, not $300,000.

A fictional house bought with cash, then refinanced with a conventional cash-out loan. Loan rules shown are Fannie Mae’s; rates and costs are examples.

• All in: $229,000: $180,000 price, $45,000 rehab, $4,000 closing costs
• Expected value after rehab: $300,000
• Refinance plan: 75% cash-out loan at 7% for 30 years, 2% loan costs
• Rent: $2,600 a month, signed 1-year lease

Mission 1: When can you refinance?

You finish the rehab 3 months after buying. Can you take a cash-out refinance now?

• Generally not yet: Fannie Mae requires 6 months on title for a cash-out refinance. Its exception for homes bought with cash limits the loan to what you documented paying to buy, not the rehab
• Yes, any time after the rehab

Ask the lender before you buy: waiting period, maximum loan, and what it needs from the appraisal.

Mission 2: The appraisal

• Loan at a $300,000 value (75%): $225,000; after 2% costs, $220,500
• Cash left in the deal: About $8,500
• Loan at a $270,000 value (75%): $202,500; after 2% costs, $198,450
• Cash left in the deal: About $30,550

A $30,000 lower appraisal kept $22,000 more of your cash in the house. Plan for a lower appraisal, and keep reserves.

Mission 3: Does it still pay for itself?

• Rent collected (6% vacancy): $29,328 a year
• Operating costs: tax $3,000, insurance $1,500, management 9%, repairs 6%: −$8,899
• Net operating income (NOI): $20,429
• Reserves for big replacements (6%): −$1,760
• Debt service on $225,000 at 7%: −$17,963: cash flow about $59 a month, DSCR 1.14
• Debt service on $202,500 at 7%: −$16,167: cash flow about $209 a month, DSCR 1.26

The smaller loan leaves more of your cash in, but the rental is healthier. Taking out every dollar can leave a property that barely pays for itself.

With $30,550 left in the deal and $209 a month of cash flow, would you buy this deal again on these numbers?

Buy, investigate or pass? Work through the drill to see what an experienced investor would weigh.