Season for twelve months at a better rate, or refinance at six and take the smaller cash-out

Question

Working through a decision that seems to split people every time it comes up, and I want to see where this room actually lands.

Setup, roughly. Rehab is done, tenant is in, and you're at the point where you can refinance. One path is to go at the earliest date the lender allows, often around six months of seasoning depending on the product and the lender, and take whatever proceeds the loan-to-value and the coverage ratio allow. Seasoning rules vary by program and change, so this is the kind of thing you confirm in writing before you plan around it.

Case for going early: capital that's sitting in a finished property is doing nothing. Every month you wait is a month you're not shopping for the next one, and distressed inventory that's available now may not be available in a year. Time in the market on the next property compounds.

Case for waiting: at twelve months you often have a full year of documented rent, which can widen the pool of lenders willing to look at the file. You also have twelve months of amortization and possibly a better appraisal if the rent has moved. In a higher-rate stretch, some people are waiting purely on the hope that the rate itself improves, which is a bet rather than an underwriting decision, and I think those two reasons for waiting deserve to be separated.

What I can't settle is whether the value of the extra capital recovered at twelve months actually beats six extra months of the next deal running. That depends on how good your next deal is, which nobody knows in advance.

omar_haddad · Answer

The separation you drew between waiting for a stronger file and waiting for a better rate is the useful part of this post. I've watched people call the second one patience when it was just hoping.

There's a third reason to wait on the renovation end that nobody puts in the model. If the rehab had any scope creep, and mine always does, the last six months of the tenancy is when you find out what you cut corners on. Refinance at six months and you might be locking a payment before the property has told you what it actually costs to run. I'd rather have two winters of maintenance history before I fix my debt service for thirty years.

marcus_hale41 · Answer

I vote by the last option, and I'd argue the other three are all versions of it. If there's no identified next deal, the capital comes out and sits in something paying very little while you shop, and you've traded a known equity position for a known worse yield plus a higher monthly payment. That's a real cost and people skip it because "recycle the capital" sounds like a rule.

harrow's maintenance history point is better than the rate-timing argument and I hadn't weighted it. The counter is that a bad surprise in month nine shows up in your coverage ratio and can shrink the loan you qualify for, so waiting can cut both ways.

One thing to check in the paperwork before you plan any of this, pike: some bridge and hard money notes carry a prepayment or minimum-interest term that makes the early refinance more expensive than the rate suggests. I've seen a six month minimum interest clause turn a "refinance whenever you're ready" loan into a de facto six month hold. Read the note, and get the payoff quote in writing rather than assuming the balance is the balance.

Season for twelve months at a better rate, or refinance at six and take the smaller cash-out

2 replies