I am looking to buy more properties and have spoken to other investors/family about. Between both cohorts I anticipate having access to about $200,000. My goal is to use that money for multi-family/buy and hold properties. The nuance would be that I would need to pay investors back their money in 6-12 months. Can anyone advise me on how I can both pay back investors and keep the property.
I am aware of cash-out refinances, but from my research there's typically only enough equity on single families to do this. Maybe it is my market (Live in New Jersey), if this is the case, please let me know which states and cities the cash re-finance method may be more conducive in. Just curious what the numbers need to look like to make the deal work in real life and how to get a seller to actually come to a number with enough equity to pull out all the investor cash.
Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
4y
@Davon Johnson - you can pull off cash out refinances in any market. You will be looking for a property where the deal is so good that in 6-12 months, you are all in for 65-70% of its current value.
In New Jersey this might look like buy a four unit for $500k with owner occupied loan, 15% down 3.25% loan (or even fha at 3.5% down but you are likely to overpay to a seller for a fha loan), rehab for 100k, property appraises for $860k after renovations and rent increases. So if you did a 75% LTV cash out refi with closing costs, you can pull out $600k you have into it (fully repaying the 200k cash). Airbnb or furnished rentals can increase your cash returns. Almost all banks will want to see a 12 mo lease and rental history before financing you. (Unless your w2 is so good the property income doesn't matter for the loan).
Case in point, friend bought a duplex in New Jersey for $250k in May 2021 and looking to cash out refi at a 350k value or higher now. $350k x .75 cash out is 262.5k. Minus closing costs for the loan, new title insurance. Mortgage will be like $2200/mo and rent is $4200/mo and there will be effectively no $$ left into the property. This is a quintessential BRRR. Some large investors have been able to do this with large multifamily properties.
Rental Property Investor · Fayetteville, NC · Member since 2020 · 27 posts · 10 votes
4y
@Davon Johnson
Great question, would love to hear from experts on this. If you don't mind me asking what type of terms did you offer your friends/family members. I have similar situation going on. I'm down in north carolina.
Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
4y
@Davon Johnson - you can pull off cash out refinances in any market. You will be looking for a property where the deal is so good that in 6-12 months, you are all in for 65-70% of its current value.
In New Jersey this might look like buy a four unit for $500k with owner occupied loan, 15% down 3.25% loan (or even fha at 3.5% down but you are likely to overpay to a seller for a fha loan), rehab for 100k, property appraises for $860k after renovations and rent increases. So if you did a 75% LTV cash out refi with closing costs, you can pull out $600k you have into it (fully repaying the 200k cash). Airbnb or furnished rentals can increase your cash returns. Almost all banks will want to see a 12 mo lease and rental history before financing you. (Unless your w2 is so good the property income doesn't matter for the loan).
Case in point, friend bought a duplex in New Jersey for $250k in May 2021 and looking to cash out refi at a 350k value or higher now. $350k x .75 cash out is 262.5k. Minus closing costs for the loan, new title insurance. Mortgage will be like $2200/mo and rent is $4200/mo and there will be effectively no $$ left into the property. This is a quintessential BRRR. Some large investors have been able to do this with large multifamily properties.
Lender · Raleigh, NC · Member since 2012 · 957 posts · 639 votes
4y
@Davon Johnson You should be discussing the topic with the lenders you are considering to do the refi. Find out what their terms and conditions are and work backward from there.
Realtor · NJ · Member since 2020 · 277 posts · 138 votes
4y
Hey @Davon Johnson, equity is equity regardless of where you are, or single-fam vs. multi! In a state like New Jersey with the prices being what they are, the "easiest" way to do what you are suggesting is going after distressed properties in seriously dilapidated condition so that your ARV is leaps and bounds above where you purchased, enabling you to extract enough cash on the cash-out refi to pay back your investors and hopefully yourself.
@Natalie Schanne's suggestion about using an owner-occupant loan with a small down payment is also a good idea so that you have a much smaller amount of cash in the deal upfront as well.
Hi @Pablo Espin, I am offering an 8% APY with it going up 12% for extensions. I anticipate holding their money for 12 months, so I plan going for an 18 month loan. The second portion is less concrete as it depends on the respective property and the amount of work that it needs.
Hey @Natalie Schanne thank you for the detailed response, that actually helps a lot. Can I ask what town your friend purchased in? And was her deal on market or a byproduct of direct to seller marketing? Will definitely start to make offers on properties through this lens.
@Kevin Manafi, gotcha. My thinking was that if a person is cash flowing from a multi-family, they are less incentivized to go 40% under ARV, whereas a single family owner may be more amenable. But you definitely are right equity is equity.