Revised Calculation

Thanks to the anonymous poster for pointing me out to a huge mistake I made in my calculation. I plead guilty to "analysis paralysis". :-)

Basically, what you are wanting to do with this process is:

1. Cash-out equity immediately for other ventures.
2. Avoid paying PMI without a substantial downpayment out of your own pocket.
3. Get a real good rate without shelling out your own money.
4. Extend the time you make your first payment by 2-4 weeks.

Now, here is how things should really occur, using an example (hopefully, I won't screw this up) ...

Purchase Price: $65,000
ARV Price: $120,000
Closing Costs (each): $1,000
Repairs: $2,000

Step #1: You buy the property for $65,000. You get a 100% loan and roll the closing costs into the loan. Balance of loan #1 is $66,000.

Step #2: Make necessary repairs to the property, and put the costs on a credit card (or borrow money from friends/family, or whatever). Balance of other costs is $2,000.

Step #3: Refinance before making your first payment on loan #1. You refinance at the ARV price ($120,000). This is where things get tricky. You are refinancing at the ARV price, but are only getting 80% LTV. So, you are only getting a loan for: 80% of $120,000, or $96,000. Since your loan is only 80% LTV, you do not have to pay PMI, and will probably get a nicer rate. Now, you can use the $96,000 from the refi to pay off loan #1 and all costs:

$96,000 - Loan #1 - Repairs - Loan #2 Closing Costs
$96,000 - $66,000 - $2,000 - $1,000
$27,000

This makes much more sense. So, you refi'd with a better rate, paid off your bills, don't have to worry about PMI, extend the time you make your first payment, and get $27,000 to use on whatever you like (holding costs, cash reserves, pay off personal bill, et al). Not a bad process. The error in my original caluclation was negating the 20% in the second loan twice. The real calculation should then be:

80%ARV - Loan #1 - Costs >= 0

IOW, if the left side of the calculation is negative, then this is not a good candidate for refinancing in this manner. Using this formula, you can then calculate other items such as the maximum purchase price (if you know the ARV price), and the minimum ARV price (if you know the purchase price). Using my example, if the maximum purchase price for the property is $65,000, then the minimum ARV price would have to be:

80%ARV - ($65,000+$1,000) - $2,000 - $1,000 >= 0
80%ARV >= $69,000

Minimum ARV -> $69,000 / 80% = $86,250

Likewise, if the ARV is found to be $100,000, the maximum purchase price would need to be:

80%($100,000) - Loan #1 - $2,000 - $1,000 >= 0
$80,000 - $2,000 - $1,000 >= Loan #1

Maximum Purchase Price -> $77,000

Of course, to have money left over, one just needs to replace the '0' on the right hand side with the amount of money they want, like so ...

80%ARV - Loan #1 - Costs = Desired Leftover Money

Again thanks to the Anonymous poster. I hope this clear things up a bit more.