Renovating Before a Cash-Out Refinance Can Change the Property's As-Is Value

This is where sequencing matters, you buy the property Monday. You already have your contractor lined up. By Tuesday, demolition begins.

• The kitchen comes out.

• Bathrooms are gutted.

• Walls come down.

• Electrical is exposed.

• Plumbing fixtures are removed.

You look around and think, “we're making progress.” And you may be absolutely right.

You're working toward a property that could ultimately be worth considerably more. But here's the financing question, what is the property worth today in the condition it's in when the appraiser walks through the door? That's a different question.

An appraiser evaluating a property for a refinance generally isn't being asked only, “what will this property eventually be worth after the investor finishes everything?” The property's current condition can matter to the financing you're trying to obtain now. That's where an investor can accidentally work against their own financing strategy.

Not Every Property Improvement Improves Today's Value

This is the distinction I want investors to understand.

• Suppose you replace an old roof, the property is still intact. You've replaced an important component of the building.

• Or perhaps you install new windows. Again, you've improved an existing component without making the property substantially less functional while the work is being completed.

Now compare that with another renovation.

• You remove the kitchen.

• Gut the bathrooms.

• Open the walls to the studs.

• Remove portions of the electrical and plumbing.

Perhaps the property temporarily becomes uninhabitable. You're spending money on improvements.

You're working toward a better property. Your projected finished value may be increasing.

But at that particular moment, the property's as-is value may have gone in the opposite direction.

That's the paradox: You may have increased the property's future value while temporarily decreasing its present value. And if your refinance is based partly on what the property is worth today, that can affect how much money you're able to pull back out.

How As-Is Value Can Affect a Delayed Cash-Out Refinance

Let's use a simplified example.

Assume you purchase an investment property for $400,000 cash and your strategy is to refinance afterward and recover a portion of the cash you used for the acquisition.

For illustration, assume the property supports a $400,000 current value before you begin major demolition. If the applicable refinance program allowed 70% LTV, the potential loan calculation would be: $400,000 × 70% = $280,000

Again, this is only an illustration. Actual eligible loan amounts depend on the applicable program, valuation, borrower qualifications and other underwriting requirements. Now suppose you don't refinance immediately.

Instead, you begin a substantial renovation.

• The kitchen is removed.

• Bathrooms are gutted.

• Several rooms are down to the studs.

• Mechanical systems are partially removed.

Then the appraisal takes place. Suppose that, because of the property's current condition, its as-is value at that moment is $325,000.

Now look at the same hypothetical 70% LTV calculation: $325,000 × 70% = $227,500

Compare the two:

Before major demolition: $280,000

After the hypothetical reduction in as-is value: $227,500

Difference: $52,500

You may eventually create a property worth substantially more than $400,000. But that doesn't necessarily put the additional money in your hands today. You intended to buy with cash and pull a substantial portion of that money back out. Instead, the timing of the renovation may have changed the collateral being evaluated for the refinance.

Cash-Out Refinance After a Cash Purchase: Don't Confuse Future Value With Today's Value

This is where investors can get frustrated. They'll tell me, “but I just put $50,000 into this property.”

I understand, but spending $50,000 doesn't necessarily mean the property is immediately worth $50,000 more. Especially when the project is halfway through. Think about a kitchen renovation. You may have already paid for cabinets, appliances, countertops and labor.

But if the appraiser walks into a room with exposed studs, no cabinets, no sink and unfinished electrical work, you're looking at a property in transition. You know what it's going to become. Your contractor knows what it's going to become. But the financing decision being made today still has to account for what exists today.

That's why, construction progress and financing progress aren't always the same thing.

Should You Refinance Before Starting the Renovation?

Sometimes that may be worth considering. But I don't want to turn this into a blanket rule that says:

“Never touch the property until after you refinance.” That's too simplistic. Every property and financing strategy is different. Replacing a roof isn't the same as removing every interior wall.

Replacing windows isn't the same as gutting the kitchen and bathrooms simultaneously.

Completing necessary repairs isn't the same as putting the entire building into a condition where it can't currently be occupied. And the appropriate financing program itself can change the answer.

The better question is, what should happen first based on the financing strategy for this particular property? That's the conversation I want to have before demolition starts.

Sequence the Financing Before You Sequence the Construction

Before you start the renovation, let's look at the entire transaction.

I want to know:

1. What did you pay for the property?

2. When did you purchase it?

3. How did you purchase it?

4. What is it worth in its current condition?

5. How much cash do you want to pull back out?

6. What renovations are you planning?

7. Which repairs are you doing first?

8. What will the property look like when the appraiser arrives?

9. What's the projected completed value?

10. And what are you going to do with the property when the renovation is finished?

Those answers can help determine how the financing and construction should be sequenced. Maybe refinancing before major demolition makes sense. Maybe it doesn't. Maybe the transaction should have been structured with rehab financing from the beginning. Maybe another financing program better fits what you're trying to accomplish.

But I would rather have that conversation while your property still has walls than after you've removed them. The Cheapest Capital Mistake May Be the One You Never Make

This is why I keep telling investors.

Don't start with the loan. Start with the deal.

An investor with $400,000 in cash may think financing isn't an immediate concern.

You already have enough money to close.

You already won the property.

You already have the contractor.

You're ready to go.

But if part of your capital strategy is getting a substantial portion of that $400,000 back, financing is already part of the deal whether you've taken out the loan yet or not. Your cash purchase and your future refinance aren't two completely separate decisions. They're part of the same capital strategy.

And the construction work you do between those two events can affect the outcome.

Buying With Cash Doesn't Mean You Should Ignore the Financing Until Later

Cash gives an investor flexibility.

But liquidity has value too.

Maybe you want to recover your acquisition capital so you can:

• Fund the renovation.

• Maintain reserves.

• Buy another property.

• Start another construction project.

• Or simply avoid having too much capital trapped in one asset.

That's why the financing strategy should ideally be considered before you spend the cash, even if you're intentionally making a cash offer. Your question shouldn't only be: “can I afford to buy this property with cash?”

It should also be: “how am I getting my cash back out, and what could interfere with that strategy?”

That's a much more important question.

Before You Start Pulling Out Walls, Call Breclaw

If you're buying an investment property with cash because you need to close quickly, that's fine. If your plan is to refinance afterward and recover some of that capital, that's fine too. But before you start tearing the property apart, understand the financing consequences.

A new roof may improve the property. New windows may improve the property. But a building with no kitchen, gutted bathrooms, exposed walls and partially completed mechanical work may present a very different as-is valuation at the exact moment you're trying to refinance it.

Don't accidentally reduce today's financing while you're building tomorrow's value.

Before the work starts, call Breclaw.

Tell me:

What you paid.

What the property is worth today.

How much cash you want back out.

What work you're planning.

And what the property should be worth when you're finished.

Then let's determine how the financing and renovation should be sequenced.

Let's structure the financing before the construction changes the property we're trying to finance.

Breclaw CapitalInvestment Property Financing | Cash-Out Refinance | Fix & Flip | Multifamily | Commercial | New Construction