How to Refinance After a Fix and Flip
Quick Answer
After completing a flip renovation, investors can refinance into a long-term rental loan (DSCR or conventional) instead of selling. This strategy builds a rental portfolio while extracting equity from the completed project.
Table of Contents
Why Refinance Instead of Sell?
Most fix and flip investors sell the renovated property for immediate profit. However, some investors choose to refinance into a long-term loan and keep the property as a rental.
This strategy is known as the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) and is popular among investors building rental portfolios.
Types of Refinance Loans
DSCR Loans
DSCR (Debt Service Coverage Ratio) loans qualify based on the property's rental income rather than the borrower's personal income. This makes them ideal for investors with multiple properties.
Key features:
- No personal income verification required
- Qualification based on rental income vs. mortgage payment
- Available for investment properties only
- Typical rates: 7-9%
- LTV up to 75-80%
Conventional Loans
Traditional mortgage products that use the borrower's personal income and credit for qualification.
Key features:
- Lower interest rates than DSCR
- Requires personal income documentation
- Limited to 10 financed properties per borrower
- Stricter qualification requirements
The Refinance Process
1. Complete Renovations
Finish all renovation work and ensure the property is rent-ready. The property should be in marketable condition.
2. Find a Tenant
Having a signed lease in place strengthens your refinance application, especially for DSCR loans where rental income determines qualification.
3. Wait for Seasoning
Most lenders require a seasoning period (time since acquisition) before they will use the new appraised value:
- 3 months: Some DSCR lenders
- 6 months: Most conventional lenders
- 12 months: Some portfolio lenders
4. Order Appraisal
The new appraisal should reflect the renovated value of the property. Provide the appraiser with details about the renovations completed.
5. Close the Refinance
The new long-term loan pays off the existing fix and flip loan. Any remaining equity can be extracted as cash.
Example
| Item | Amount |
|---|---|
| Original purchase | $180,000 |
| Rehab costs | $60,000 |
| Total invested | $240,000 |
| New appraised value | $340,000 |
| Refinance at 75% LTV | $255,000 |
| Cash out after payoff | $15,000 |
| Monthly rent | $2,400 |
| Monthly mortgage (DSCR) | $1,900 |
| Monthly cash flow | $500 |
In this example, the investor recovers their capital plus $15,000 and keeps a property that generates $500/month in cash flow.
Related Reading
Key Takeaways
- ✓Refinancing builds long-term wealth through rental income
- ✓DSCR loans qualify based on property income, not personal income
- ✓Seasoning periods of 3-6 months are common
- ✓Cash-out refinancing can recover your invested capital