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Cash Out Refi Strategy for Acquiring Rentals

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Chris Clothier Verified Donor

Real Estate Investor from memphis, Tennessee

Nov 20 '12, 02:37 PM


@Jimmy H. -

I was reading down this thread and @David Beard beat me to the comment. This is a great strategy on paper, but can become a flawed strategy to execute very quickly and I personally know. The leverage amounts can put you and your portfolio under a great deal of stress and with each successful refinance (if you even get that far) you feel like this is the greatest thing since the dude climbed the beanstalk and found the goose laying golden eggs. Even thinking this strategy can lead to poor decision making like buying subpar deals simply to pull money out and eventually getting swallowed by upkeep, record keeping, maintenance and vacancies in the rental portfolio.

I'm not saying that you are going to go down that path, I'm just saying that many have been seduced by this "get paid to buy rental property strategy" and many have ended up losing a lot.

On a side note, it really concerns me for the real estate market that banks are even starting to think this way and offer this alternative again. This is absolutely why many investors failed from 2003-2008.



Medium_new_mi_logoChris Clothier, Memphis Invest, GP
Telephone: 901-212-9647
Website: http://www.memphisinvest.com
www.MemphisInvest.com 1(877)-773-9998 Chris D Clothier


Tim Czarkowski

Residential Real Estate Agent from Jacksonville, Florida

Nov 20 '12, 02:39 PM


@David Beard What is the delayed cash out financing rule? I have considered using this strategy in the past but didn't realize they don't do cash out refinancing on 5-10. That would certainly put a damper on the plan. I have only one conforming loan right now and two free and clear properties I was thinking about pulling money out of.



Tim Czarkowski

Residential Real Estate Agent from Jacksonville, Florida

Nov 20 '12, 02:45 PM
2 votes


@Chris Clothier I would think that as long as you are conservative with your estimates and have strong cashflow you would be just fine. It shouldn't be much different from getting a normal conforming loan to purchase a property. Obviously if your buying marginal properties your likely to get yourself into trouble no matter what. It seems like people these days are much more focused on cashflow then during the boom. Rapid expansion can cause troubles too but being forced to wait 6-12 months should minimize that. With the 10 property cap on conforming loans that also should help keep people from getting themselves into trouble.



Chris Clothier Verified Donor

Real Estate Investor from memphis, Tennessee

Nov 20 '12, 03:28 PM
1 vote


@Tim Czarkowski - Your previous post about owning a property free and clear and wanting to pull some cash from those properties is very different from a strategy of buying cheap with cash, doing a fix-up, having a bank that places a very advantageous value on the property and then lending 70-80% on the property. I AM NOT SAYING THAT ANYONE IS DOING ANYTHING WRONG...Needed to be clear on that. That is a strategy that relies on finding properties that have super deep discounts, require littel cix-up and that there is still a healthy spread between costs (purchase+rehab) and value.

It led people to do crazy things and the words "CASH OUT" are the difference makers.

If someone simply wants to refinance all or some of their costs and recover a portion of their costs, that is a different strategy that buying a property simply because the math says you can walk from the closing table at refinance with all of your costs plus additional cash!

Lastly, for anyone reading this - there is no judging here, just my opinion. Do deals however you want and best of luck to whichever strategy you take. I am simply giving a point of view based on 10 years of experience which includes good decisions and bad decisions...lol.

All the best - Chris



Medium_new_mi_logoChris Clothier, Memphis Invest, GP
Telephone: 901-212-9647
Website: http://www.memphisinvest.com
www.MemphisInvest.com 1(877)-773-9998 Chris D Clothier


Tim Czarkowski

Residential Real Estate Agent from Jacksonville, Florida

Nov 20 '12, 04:01 PM


@Chris Clothier I hope you didn't take my post the wrong way. I was just pointing out that there is also a good way to execute this strategy. I understand you didn't mean that people were doing anything wrong but that they could get themselves into trouble. I completely agree with you that "cash out" shouldn't be the magic words to do a deal. That's a terrible strategy if they can't support the debt load. As long as you are conservative, as with anything else you a much less likely to get yourself in trouble. I personally only purchase properties that will leave me with a lot of free cash flow even if leveraged up to 75%. If they don't, it's not a good rental. It may be a good flip but not a good rental. In that case it should just be sold.

I wouldn't think too many banks are being aggressive on their values these days. They certainly were before the crash but it seems they have done a complete 180. I've had the opposite problem in several deals recently. In one appraiser was comparing a trashed out bank foreclosure to a property that just recently had a full rehab like it was an apple to apple comparison. I eventually got him to come up to the sales price by sending him a few decent comps.

The properties I am looking to pull money out of fit this scenario perfectly. The one was purchased a year ago and the other several months ago. We paid cash, rehabbed them, and rented them out. They are both 2 units, provide great cash flow, and with purchase+rehab are still below 70% of market price.

Everyone makes mistakes, I certainly have. lol Anyone with a business the size of yours certainly has and it sounds like you have an absolutely amazing business. You just can't be successful without making some mistakes. You have to try to learn from others mistakes and when you can't, make sure they are not career ending mistakes. Once again I completely agree with you that you could get into trouble if your focused on the wrong thing and that is true of many strategies. There are good ways to implement them and bad ways also.



Chris Clothier Verified Donor

Real Estate Investor from memphis, Tennessee

Nov 20 '12, 04:12 PM


Absolutely @Tim Czarkowski. I wanted to be sure that @Jimmy H. knew I wasn't attacking or judging him for asking about or trying this strategy. I appreciate the great back and forth on forums like BiggerPockets.com and the chance to have some real conversations and share ideas. So no, I did take your post the wrong way, I just wanted to be real clear about what I thought was risky in paying cash and refinancing.

Great point btw that there is risk in every strategy and if you push the limits you can hurt yourself and others in the process.

Have a good one - Chris



Medium_new_mi_logoChris Clothier, Memphis Invest, GP
Telephone: 901-212-9647
Website: http://www.memphisinvest.com
www.MemphisInvest.com 1(877)-773-9998 Chris D Clothier


David Beard

Real Estate Investor from Cincinnati, Ohio

Nov 20 '12, 05:31 PM


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



E-Mail: [email protected]
Telephone: 502-321-6328


Tim Czarkowski

Residential Real Estate Agent from Jacksonville, Florida

Nov 20 '12, 06:04 PM


@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.



David Beard

Real Estate Investor from Cincinnati, Ohio

Nov 20 '12, 06:16 PM


@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.



E-Mail: [email protected]
Telephone: 502-321-6328


Tim Czarkowski

Residential Real Estate Agent from Jacksonville, Florida

Nov 20 '12, 06:27 PM


@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.



Shane Johnson

St Paul, Minnesota

Nov 21 '12, 07:43 AM


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.



David Beard

Real Estate Investor from Cincinnati, Ohio

Nov 21 '12, 08:52 AM


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.



E-Mail: [email protected]
Telephone: 502-321-6328


Frank R.

Real Estate Investor from Fresno-Visalia, California

Nov 21 '12, 12:03 PM
2 votes


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




Frank R.

Real Estate Investor from Fresno-Visalia, California

Nov 21 '12, 08:08 PM


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.




Shane Johnson

St Paul, Minnesota

Nov 21 '12, 08:55 PM


you mean let the bank make money off your renters ;)



Frank R.

Real Estate Investor from Fresno-Visalia, California

Nov 29 '12, 07:45 PM


These loans have been a very slow process. I'm looking at +45 days and no loan docs yet.




Tiger M.

Property Manager from Las Vegas, Nevada

Nov 29 '12, 09:54 PM


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.



Tiger M., TRADEWIND INVESTMENTS REAL ESTATE AND PROPERTY MANAGEMENT
Telephone: 702-870-5500
Website: http://TRADEWINDVEGAS.COM
Tiger M 702-870-5500


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