Real Estate Investor · College Station, TX · Member since 2011 · 105 posts · 18 votes
I have done some cash purchases and purchased with financing also. I dont really have any refinance experience. I am looking at purchasing a home that we would like to get closed on fast due to the rental season where I live. Obviously cash speeds things up, which we can do, but we would really like to have it financed for 30 years at a low rate with one of the big banks/ lenders.
Are there any up sides or down sides to refinancing after closing a cash deal vs just financing it to start with?
The seasoning requirement will depend on what you're using for a value. If you're willing to use the price you paid, and refi for about 70-75% of that value, you should be able to do this fairly quickly. If you want to use a new appraisal, six months to a year would be the norm.
You may run into seasoning requirements (of up to a year) since it will be considered a cash out, not a rate and term refi. Check with your bank first to determine refi underwriting guidelines.
This is a great way to get great deals and close them fast. Most conventional lenders will require six months of seasoning period. If you can wait that time or can find a better option I would say this is the way to go.
The seasoning requirement will depend on what you're using for a value. If you're willing to use the price you paid, and refi for about 70-75% of that value, you should be able to do this fairly quickly. If you want to use a new appraisal, six months to a year would be the norm.
The advantages of paying with cash and then doing a re-fi are that you can close on the property quickly and (if you wait long enough) you can use your after-repair appraisal value to determine your loan amount. If you can find a good enough deal, you can get most or all of your cash back out. The disadvantage is that you tie up your cash during the seasoning period, and it may be a little tougher to find a cash-out refi lender than it would be to find a lender for a purchase. I use a regional bank that does conventional cash-out loans after 6 months using appraisal value - I suspect you can find one in your market.
Fannie Mae put out new guidelines a few months ago waiving the seasoning period if you bought with cash and your cash-out loan amount does not exceed the purchase price for the property. I don't know if the banks are following this. There's a thread on here about it.
The costs will be about the same. A big chunk will be the title insurance for the lender. Another big chunk is the origination fee and other lender fees.
You'll have to hunt around to find someone who will do it quickly, so don't give up after talking to a handful of lenders.
Since you're talking about refinancing with a 30-yr fixed, you're referring to conventional, and I'm assuming you have less than 10 financed properties now.
I use a similar approach, that started when I had the same thoughts you did.
Difference with me is I use a small less 3 branch offices bank, and they do the loans on a portfolio basis rather then just originating and shipping it out.
I purchase cash, rehab, rent, then finance. Doing it that way makes the funding time go really fast, really fast. Its just a cut and dry numbers deal. Where if done at purchase it has a whole portion of it that is speculation; "rehab SHOULD be this much, arv SHOULD be this much, rents SHOULD be...". By having it all done its a 1,2,3 of the numbers.
AND by it being portfolio, I can have as many as they will hold, be it 5, 10, or 500.
If you have the funds, I suggest it as a good method, unless it impacts your operations due to liquidity.
Refinancing with hard money will cost you points. They will only do a percentage of what you paid for it. Most will only do 6 month loan while some will do 12 months or more. Depends on what State the property is in really. I get a lot of requests for this and I can be frank and honest about your options....
Until Fannie/Fred changed the rules, I used to do this all the time -- buy with cash and refi. Then, Fannie/Fred changed their rules and now, if you are going with a lender that is following Fannie/Fred's guidelines, you can only do a refi if you have <4 properties. If you have >4 mortgages, they won't do the refi on an investment property. Period. VERY frustrating. That means we have to find the smaller banks that portfolio their loans.
Laura -- it does appear you can do a c/o refi on loans 5-10. I quote from the article at www.themortgagereports.com, which can be found by going to the linked thread I mention earlier in this thread:
"Delayed Financing Rule mortgages are subject to a 70% loan-to-value limit except for investors with more than 4 properties financed.
For investors with more than 4 properties financed, the Delayed Financing Rule LTV limit is 65%, and other 5-10 Property Program restrictions apply, too."
We did one last year. Bought a severely damaged house. Paid cash for it and the rehab. Got it leased and refinanced for 80% new appraised value with a local bank. Ended up with $10K actual cash and $35K equity in a $125K house. 5 months from first closing to refi.
Still married too :) It was not an easy one. $37K purchase, $60K rehab, $90K loan.
I am doing tons of refi's right now. I found a local company through networking that has no seasoning on refi's. They will refi the full loan amount plus their refi costs but no more than 75% LTV. So I am out of pocket absolutely 0 money for most of my deals. This is great for me because me and my credit partners can get more deals done this way. When you just buy a house and put 20 %, most people would eventually run out of money quick. We have just been keeping our down payment money and keeping the money in reserves. Our lender Denver Mortgage Company requires 6 months reserves per property you own and they will lend up to 10 properties. They are a portfolio lender. So call around and go to local clubs to find lenders like this in your area. I think it's worth it. My average cashflow per rental is $500. But I have others that cashflow $700 and this is with a 30 year fixed loan with interest rate of 4.8% for investor loan.
Good feedback, Monica. Most advocate computing true cash flow more conservatively for single family houses, however (Gross rent divided by two, minus P&I).
Also, it seems unlikely that they're doing 30-year fixed as a 4.80% portfolio loan (i.e. keeping it on their books), seems more likely to be a secondary market loan. Lenders just typically cannot tolerate the interest rate risk of 30-year fixed loans funded by CD's and checking accounts. Please correct me if I'm wrong...
Are you buying up front with cash, or using hard money? Just wondering if the back-end refi is a cash-out refi, or a no-cash-out (i.e. rate & term) refi.
This sounds like a good loan program, and is right in B.P.'s back yard!
I've been doing the same as Monica, but I'm not getting near 4.8% at 30 years fixed. I'm using a local bank at 5.5% with 3 or 5 year ARM. May not work as well with buy and holds, but works really well with flips because I don't have to keep any of my cash in them while they are being sold or lease purchased.