Which Renovation Costs Count Toward Your Refinance Value

The short answer: a lender adds your renovation money to the property's cost basis only if the work was a capital improvement, only if you paid for it yourself, and only if you can produce paid invoices. Work that was financed does not get credited. Cleanup does not get credited. And on most timelines it does not matter at all, because once you have owned the property long enough, the appraised value stands on its own and cost basis stops being the constraint.

That is the whole thing. What follows is the detail, taken from the program guidelines rather than from BRRRR forum lore.

Where cost basis comes from, and when it binds

On The Fiirm's DSCR program — 1-4 unit residential investment property — the loan amount is the lesser of two calculations. LTV is the loan amount divided by the value of the mortgaged property. LTC is the loan amount divided by the cost basis at the loan origination date, and is only used when the subject property is a new acquisition.

Cost basis is a defined term. It is:

• the purchase price, plus
• borrower-paid hard and soft costs expended to date — this is the renovation bucket, and it is where the CAPEX test lives, plus
• customary borrower-paid, arm's-length closing costs and fees: real estate broker commissions, title, escrow, other closing costs, and the amount of taxes, HOA dues, fees, assessments, assignment fees, and liens paid by the borrower or its affiliates in connection with and at the time of acquisition.

Two carve-outs sit inside that definition. Assignment fees greater than 10% of the purchase price will not be considered. And mortgage broker fees, origination fees, points and similar charges are excluded outright — those are financing costs, not property costs, and they never make it into basis.

There is one mercy provision. If closing costs are not documented or clearly verifiable at closing, up to 2% of the purchase price may be added for the assessment of cost basis. That fallback is for closing costs only. There is no equivalent for renovations — no percentage you get for free because the receipts are messy.

The CAPEX line

The guideline defines capital expenditure and then, unusually for a guideline, gives you both sides of the line with examples.

CAPEX is a long-term investment made to improve or increase the value of the rental property. The examples named are a new roof and a new HVAC system.

Then the exclusions, named explicitly: demolition, removal of debris, fixing lights and outlets, and removal of carpet are not considered CAPEX.

That second list is the one investors get wrong, and it is not arbitrary. Demolition, debris removal and carpet tear-out are preparation — subtractions from the property, not additions to it. Fixing lights and outlets is a repair: you restored something to working order rather than extending the useful life of the asset.

The distinction underneath all four is improvement versus repair. That framing is stated directly in The Fiirm's commercial program glossary, which defines capital expenditure as an improvement, as opposed to a repair, to a fixed asset which will increase the value or useful life of that asset — typically amortized or depreciated over the useful life of the asset, as opposed to a repair, which is expensed in the year incurred.

So the working test is: did this add value or useful life to a fixed asset, or did it restore, remove, or prepare?

Be careful with the top-left rows. A new roof and a new HVAC system are the only two improvement examples the guideline names. Everything else — new windows, a replaced electrical panel, a full kitchen, a foundation repair, a new water heater — is my generalisation from the improvement-versus-repair principle, not a list the guideline publishes. It is a defensible generalisation and it is how the definition is written to be applied. But if you are counting on a specific line item to carry a deal, get it confirmed before you spend.

Why financed work does not count

This is the part that catches experienced investors.

The Fiirm's commercial program states it flatly. On a cash-out refinance where ownership is under 12 months, the borrower must provide satisfactory evidence of capital expenditure on the subject property to support the value increase — and that expenditure cannot be financed, and is subject to review of paid invoices.

The DSCR guideline does not use the phrase "cannot be financed." What it says instead is that cost basis is inclusive of borrower-paid hard and soft costs expended to date, and that paid invoices to document CAPEX may be required. Its own worked example labels the renovation figure "Paid and Documented Renovations." And in the delayed financing section, the settlement statement from the purchase must reflect that no financing was obtained for the acquisition.

I am reasoning from those three signals rather than quoting a single sentence, so take it as a reading and not a quotation: on DSCR, the credit is for money you spent, past tense, out of your own pocket, and evidenced by an invoice marked paid. On the commercial side the prohibition on financed expenditure is written out in so many words.

The logic is straightforward. Cost basis measures your economic position in the asset. If the roof was paid for by a construction draw, a rehab facility, or a line of credit that still has a balance, you have not funded that improvement; a lender has. Crediting it in basis and then lending against it means lending twice against the same dollar, and handing you the proceeds as cash-out.

When cost basis actually constrains you — and when it stops

None of this matters forever. Cost basis binds inside a seasoning window, and outside that window it falls away.

On DSCR standard loans, for both rate-and-term and cash-out refinances:

• Owned 3 to 6 months, measured from the note date: use the lower of cost basis or appraised value to calculate LTV. Or — and this is the exception that makes the CAPEX question worth money — if cost basis exceeds the purchase price by 120% or more, the appraised value can be used to calculate LTV, but the total loan amount is limited to no more than the cost basis.
• Owned more than 6 months: use appraised value.

For portfolio loans the test runs on average ownership across all properties in the loan: under 6 months, use the lower of cost basis or appraised value for all of them; over 6 months, use appraised value.

Separately, the guideline states that where a property is owned less than six months, the purchase price must be used as value instead of the appraised value, except where the loan amount is less than or equal to the cost of the property plus all documented renovation costs.

Read those together and the shape of the rule is clear. Under six months, your documented renovation spend is the thing that lets the appraisal into the calculation at all. It is the bridge between what you paid and what the property is now worth.

The worked example, and what it shows

The DSCR guideline runs its own illustration, and it shows exactly where the CAPEX credit lands.

Assumptions: purchase price $200,000. As-is appraised value $500,000. Closing costs $4,000. Paid and documented renovations $102,000.

Cost basis is $200,000 + $4,000 + $102,000 = $306,000.

That cost basis is 153% of the purchase price, which clears the 120% threshold. So the current appraised value can be used to calculate maximum LTV. At an assumed maximum 80% LTV, $500,000 supports a $400,000 loan.

But the loan amount is limited to the cost basis. The answer is $306,000, not $400,000.

Two things fall out of that.

First, the $102,000 of renovation is doing double duty. It pushes cost basis past the 120% trigger — without it, cost basis is $204,000 against a $200,000 purchase price, or 102%, nowhere near the threshold, and you are stuck on the lower of cost basis or appraised value. It also raises the ceiling once you are through the door. Every documented CAPEX dollar in that window is close to a dollar of borrowing capacity.

Second, if some of that $102,000 turns out to be demolition and debris removal, it comes out of cost basis on both counts. It lowers the ratio and it lowers the cap.

What documentation actually gets the credit

The DSCR guideline's requirement is that paid invoices to document CAPEX may be required. "May" is the guideline's word, and I am preserving it — this is not a universal condition on every file. But you should plan as though it will be asked for, because the alternative is discovering in underwriting that a five-figure line of your cost basis has no support behind it.

The commercial program is more prescriptive about the form, and it is a reasonable template for what to keep either way. It asks for a capital expenditure schedule for the subject property, applicable only where the capital expenditure or improvement occurred in the last 12 months, on a lender form where applicable. Contractor invoices or bank transactions are acceptable in lieu of a capital expenditure schedule. Copies of receipts may be required to substantiate the schedule.

One more DSCR rule matters if your acquisition met the guideline's flip definition: a second appraisal is required, value increases should be documented with appraiser commentary and recent comparable sales, and sufficient documentation to validate the actual cost to construct or renovate — purchase contracts, plans and specifications, receipts, invoices, lien waivers and similar — must be provided where applicable.

So: keep the invoice, keep proof it was paid, keep it separated by property, and keep the improvement work distinguishable from the cleanup work on the face of the document.

Where the commercial program differs

If your property is commercial rather than 1-4 unit residential, the same concepts apply with different dials.

That last row is the sharpest difference. The commercial guideline reserves the right to cap cash-out at what you actually put in — capital expenditure plus closing costs — regardless of the appraisal and regardless of the timeline. If your commercial refinance thesis is built on pulling out more than you spent, price that reservation in.

Three ways investors lose the credit

Paying cash and never getting an invoice. A cash payment to a crew with no paperwork is, for cost basis purposes, spend that did not happen. The dollars left your account and produced no borrowing capacity.

Running the renovation through a rehab line and refinancing before it is repaid. This is the one the whole page is about. If the improvement is still financed, do not build your exit around it counting in basis.

Assembling receipts you do not need. The reverse mistake. Past six months on DSCR you are on appraised value, and the CAPEX documentation question largely falls away. Check which side of the window you are on before you start the paperwork.

What this page does not do

This page explains how renovation spend is treated in a cost basis calculation on The Fiirm's DSCR and commercial programs. It does not do the following.

It does not price your loan or approve anything. Cost basis is one input. DSCR, credit, reserves, occupancy, property condition, property type and market all sit alongside it, and any one of them can be the binding constraint instead.

It does not give you a complete CAPEX list. The guideline names a new roof and new HVAC as improvements, and demolition, debris removal, fixing lights and outlets, and carpet removal as exclusions. Everything beyond those six items in this article is reasoning from the improvement-versus-repair principle, and it is clearly marked as such above. Do not treat my generalisations as underwriting decisions.

It does not answer the borrowed-money edge cases. Whether a particular funding source counts as "financed" for your file is a question for a human with the invoices in front of them; I have said above where the guideline text runs out.

It is not tax advice. Capitalisation for lending purposes and capitalisation under the tax code are related ideas that do not always land in the same place. Your CPA governs your return; this page governs a loan file.

And it is not a substitute for the current guidelines, which change. The DSCR figures here are from v28 effective 5/1/2026 and the commercial figures from the program guidelines effective 8/3/2026. Before you commit capital on the strength of an article, confirm the number against the version in force.

If you want the specific answer for a property you already own, the fastest route is the settlement statement, the invoices you have, and a straight conversation about the ones you do not.

Guideline DSCR V28 · Reviewed August 31, 2026

Published August 31, 2026 · Updated August 31, 2026