Can work great. We did it numerous times. Pull the money out on the backend.. That said, the analysis all depends on the market. Last we looked at Denver you'd be insane to try to buy to BRRRR / rent properties... CALifornia seems the same way to me but I haven't looked at many sub markets, and I have no idea where Brentwood is.
You ask if it would be wise... Most decisions should be between something, and something else. What's your something else? What other things are you considering doing? That will help.
BRRRing with cash is different and you can do a refi using the Delayed Financing Exception. Banks will refinance the property you paid cash for, but only on the amount used to purchase the home and not the renovations.
For example, if you spent 65k on the house including closing costs, then added another 30k for renovations, you'd only be able to get 75% of the LTV of the 65k you used to buy the property, and not 75% of the ARV.
@Bob Okenwa thanks for the info. I am familiar with delayed financing. Would the play then be to pay for everything cash and later apply for a LOC on the new appriased value? I know that many lenders have different seasoning requirements etc. Certainly would want to have the exit strategy figured out prior to purchasing.
@Jim Goebel how did your financing workout for yours?
Here is something I learned and am looking to implement once the opportunity presents itself:
Create an LLC and have the LLC lend you a mortgage on the property you are receiving. The reason why this works is because instead of you needing cash or receiving a cash out loan, we are now refinancing a loan – your loan. There no reason to wait any time or have any "whichever is lower" rule come into play. We are just refinancing a loan. Here's how it works:
You create an LLC. You buy a home. Your LLC gives you a loan for the home. You file the deed for that loan at the county courthouse. You use the money from the LLC to buy and fix up the property. Once the property is completed, your conventional lender comes to refinance the loan. Your conventional lender runs title and sees there is a loan. Your conventional lender refinances you into a new loan, and cuts a check to your LLC in the amount of 75% of the value. Please don't confuse this 75% with a "cash out" amount. The non-cash out LTV on a refinance is also 75%. We are refinancing a mortgage. Your LLC's mortgage. Essentially your LLC has become the bank/hard money lender/etc. However you want to think about it. You get to set the interest rate (it can be 0%) and you get your investment amount back sooner. Some things to think of:
To file a deed at the county courthouse is $100-$150 in cost (depending on which county) And you want that note to be pretty close to 70% of the ARV for the property if you don't want to bring any money to closing. 70% will allow you to roll in your closing costs. If you want it to be at 75% just keep in mind you would need to bring your closing costs out of your pocket to complete the refinance.
Hope this helps..
@Jorge Ruiz sorry I'm so late to this thread! That's an interesting strategy. I wonder if this will work or if there's any unforeseen issues or things that would be red flags to a lender come time to refinance.
@Bob Okenwa I have recently heard of folks adding their renovation costs right into the hud and therefore able to get all or most of their cost plus renovation costs back upon refinancing.
@Jorge Ruiz - This is AWESOME!
@Jorge Ruiz , have you been able to implement your idea that you detailed above?
That's a great way to do it, you just need to make sure the banks you want to work with are willing to do cash out loans.
Not quite yet but I have spoken to at least three investors through BiggerPockets that are pulling off the strategy.
It is not a cash out loan – you are refinancing an existing mortgage.
Okay @Jorge Ruiz - what do you think of this...
Let's say I purchase the property for $50k, but file the mortgage at 75k. I complete a $25k rehab on the property so I am all into it for $75k now. I want to do a refi, so they appraise it and the appraisal comes in at $100. In theory, I should have no problems there, right?
you want that note to be pretty close to 70% of the ARV for the property if you don't want to bring any money to closing. 70% will allow you to roll in your closing costs. If you want it to be at 75% just keep in mind you would need to bring your closing costs out of your pocket to complete the refinance.
Also make sure you make the monthly payments to the LLC that is loaning you the money for the purchase. The bank will want to see a track record of you paying your loans off.
I can't wait to implement it- I have an agent/PM looking at a property for me in Milwaukee now. Hopefully it can work out so I can implement the strategy.
If anything reach out to @Andrew Postell he is the one who introduced this to me on another post.
All the best...