How do I cash out refi a property with one year of tax returns

Question

There is a little more to this post than I could fit in the title.

I purchased a duplex in cash for $96,000. From market analysis I suspect the home will appraise for 125-135 conservatively.

The rents are 1,000 and 700 ( how I negotiated the price was rent locking the lower unit for one year, stipulation from old owner).

I started as an agent in another state February of 2020, just before the pandemic. I have a solid income but want to know how to cash out refi so I am in position to purchase more properties.

I understand that I need to work with a local bank, most likely. However what loan products specifically should I be inquiring about? Also, 12.1.21 will be the first month it is fully rented.

Thank you!

Andrew Postell · Answer

@James A Spear thanks for posting. I'm assuming this is a rental property and based on your description you likely would not be able to get "conventional" financing....meaning, "delayed financing" would not apply here.  Also, usually it's 70% LTV on a cash out loan when it's a duplex.  There's always exceptions to these rules but here's some important things to consider:

Generally speaking there are 2 main types of loans for investors:  “Conventional” and “Portfolio”

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names).  These loans are all 30 year fixed rate loans.  They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending.  Fannie/Freddie money = Fannie/Freddie rules.  NOT the bank's own money.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money.  Sometimes referred to as "commercial" loans.  These loans are a lot more flexible than "conventional" loans.  Bank's money = Bank's rules.  If they like you, then maybe they will lend to you.  But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term.  The most common portfolio style loan in Texas is a 20 year adjustable rate loan.  These loans are easier to get but the terms are different.

So with conventional loans there are the hard line rules - like delayed financing - that every lender must obey.  Income, tax returns, etc. are all measured and formulated in those loans.  But with portfolio loans, anything goes. Now, because ANYTHING goes....and there are over 8,000 banks/lenders in the USA that means there are over 8,000 different portfolio types of loans.  And that's not an exaggeration.  So how you do know where to even start?   Well, posting on Bigger Pockets is a great place to start. Lots of people will help.  There's even a state forum for more "local" types of questions like this one.  You just needed to know what to ask.  And leaning on a local real estate investor is actually an easier path than leaning on a local bank.  I mean, a local bank might be your best bet...but which one?  Another real estate investor in your area might already know.  I did write a pretty lengthy post on this topic that you can read HERE.  You can 100% find a good loan.  Feel free to post if you need anything else.  Thanks!

Aaron W. · Answer

@James A Spear Congrats on purchasing this duplex.

Since you purchased this in cash, you can do delayed financing on the property to get back the cash you put in. However, there are caveats to it. You are limited to the LOWER of the the total cost to purchase the property as found on the closing statement (HUD-1) or 75% of the appraised value. I've done this with a few property we purchased with cash.

If you want the higher appraised value, then you'll need to wait for the property to season (typically around 6 months) before starting the financing process. This will also allow you to make any needed rehab to force appreciate the property.

Best of luck!