Cash Out Refi Strategy for Acquiring Rentals
I'm close to completing my second flip, I just listed the property on my local MLS when I had an idea:
Why not cash out refi for more than I have in the property.
I bought the house for $40k in cash, I have less than $70k in it and it is worth about $95k.
At 75% LTV, I can cash out $71,250.
So, If I buy the houses right (cheap enough) and can fix them up for less than 75% of the appraised ARV value, why not cash out refi until I have the max number of mortgages and maybe even get paid to purchase homes.
Most cash out refi's require that you've owned the property 6 months, will loan at a max LTV of 75% and my lender will even include 75% of the rents in your DTI calculation if you can simply show a lease. With rates so low, PITI is rarely more than 75% of monthly lease, so DTI is never a restriction.
You can only have 4 mortgages traditionally, but new rules allow you to have up to 12 if you can hold sufficient reserves (6 months PITI for each).
I know it takes a bit of cash/capital up front to get started as I have been buying and renovating with cash. But has anyone pursued this strategy?
Anything I might be missing? Seems like I could potentially get paid to amass a portfolio of 1-4's.
Originally posted by Tim Czarkowski:
David Beard What is the delayed cash out financing rule?
Tim, google search on this: site:www.biggerpockets.com delayed financing rule
Chris Clothier Ok great, I thought that was directed at my post.lol The back and forth is the best part of a forum like this. You get to see the different sides of an issue as opposed to just one aspect.
David Beard Thanks for that, I read a few of the posts and I want to make sure I understand this correctly. So for loans 5-10 the only way to refinance conventionally is to use the delayed financing rule? In addition they limit you to 65% or purchase price + rehab, which ever is lower, but with no seasoning?
It sounded like several people found small local banks that would do portfolio loans up to 75% with no seasoning. I guess when I get to 3 I should start shopping around. lol That would certainly be very useful.
Tim Czarkowski - yes, you're exactly right, except that it should be noted that you must have paid all cash to purchase the property, and you have to prove with bank statements, that the cash to purchase was not borrowed.
Finding local banks or CU's that will do immediate appraisal-based refi's on investment property is VERY DIFFICULT. I know of none in my market. The banks are understandably very skeptical of appraisals that show immediate and significant equity creation above the cost of rehab.
David Beard I can certainly understand why they might be skeptical, particularly after the crash. I saw a show where a group of investors, straw buyers, appraisers, and mortgage brokers all got together to defraud the banks. People like that hurt everyone else. The truth is that you can purchase places for less than market value and you can increase value by more than what you put into a property. Finding someone who does it in this area may not be likely but I'll at least give it a shot. It would certainly be worth my time if I found someone.
Take this with a grain of salt, as I have a miniscule amount of experience as the rest of you....
My opinion (maybe influenced by the fact that im considering it and in the position to do so) is that the Cash Out strategy is still a great strategy. That said, I will say it is ONLY if you buy right. Back in the boom, prices were high, appraisals were extremely inflated, and investors that David speaks about leveraged out these properties to a point (I am guessing) where they barely cash flowed, or broke even, gambling heavy on appreciation and principal accumulation. I find this mind boggling, because even as a 26 year old newbie, and before even reading more into it, I came to the conclusion that I if I cashed out, my SFH needs to cash flow at least $2-300 a month at current rental rates. What if (because of multiple variables) rents drop $1-200 a month!? You may have just hosed yourself. This also gives you room to accept less rent, if need be, in order to keep the property filled 100% or close to it.
I think it is a viable option these days IF.
1. you buy right/deep discount
2. study comps in your area to find the exact ARV
3. rehab the property out of pocket on things that will specifically increase value - maybe work hand in hand with a private appraiser for an opinion/advice on where to prioritize your improvements?
4. know exactly what it will rent or sell for finished, if a BAH/rental make sure to leave yourself cash flow. Conservatively $200 a month or more.
Again I dont have much experience, but this is my opinion/thoughts thus far.
Originally posted by Tim Czarkowski:
So for loans 5-10 the only way to cash-out refinance conventionally is to use the delayed financing rule? In addition they limit you to 65% or purchase price + rehab, which ever is lower, but with no seasoning?
Actually, the limit is 65% or purchase+closing costs. Rehab costs cannot be factored in.
I've been following this strategy for a few years. However when I cash out I usually do not recoup all of my cost in the deal. Today I had 4 properties appraised by a local bank for a cash out, 10 year loans, 5.2%, 75% LTV. My previous 10 other cash outs were with another bank at 15 year loan, 6.5%, 65% LTV.
This is whats going on in my mind....
-Purchase 40-70K properties that produce a $200+ cashflow after expenses each month.
- Keep a solid day job
- Your property reserve should be monthly expense of at least $50 per property
- Vacancy makes me sick
- I'm never sick
- Personally manage properties
- Good record keeping
- Own other assets
- Recycle your capital and buy more assets
- Professional tax returns
- Buy Adobe, all your documents like loan applications should be typed, do not hand write them and look like your in grade school, report cards do not exist, financial statements are what matters
- Go above and beyond delivering any request a bank might have quickly, neatly and in person
- Provide more information to the banks that will make you look attractive
- Buy sees candy for the receptionist
- When your rejected by one bank call 5 more
- Question everything, most of the time frontline bankers have there head up ... so question stuff and get to the decision makers
- Document your repairs and buy a binding machine to present portfolios to the bank and impress the crap out of them
- When you deliver items to the bank keep them simple. If you over complicate a letter or anything you will confuse them and potentially lose the interest of the bank.
- Keep a one page document with your goals and vacancy rates
I also wouldn't argue over a .5 or 1% + - interest rate. If your deal pencils out let the bank make some money on you.
you mean let the bank make money off your renters ;)
These loans have been a very slow process. I'm looking at +45 days and no loan docs yet.
You could keep it simple, sell it and buy 2 more, flip one then keep one. David Beard madae an great comment above, when you have a couple of bad months, not being "strung out" on high LTV debt can be a lifesaver.