Hi, we are working on our "buy and hold" business plan and came up with a couple of questions related doing cash buys of residential properties followed by refinancing to pull equity out.
We are planning to build a portfolio of single family or small multi-family homes for rentals. We intend to make initial purchases with cash as we assume the deals will move faster and we can probably get a slightly bigger discount on asking price if we propose an all cash deal. However, this strategy cannot scale indefinitely! Our questions are:
- Are the total closing costs and lender fees significantly higher o effectively to this process in two steps? Step 1: Buy the house for cash. Closing costs don't include any lender related fees. Step 2: Refinance (70%-80% of the homes value) to get some of the cash out to purchase the next property.
- Is this refinance going to feel more like a typical residential loan closing or does it feel more like a home equity loan process? I know this is probably fairly rudimentary for a lot of you so hopefully this is an easy one to answer.
Thanks in advance!
I've done this three times. You are very much right that if you buy for cash (especially in the off-season, and a house that has been on the market a while) you can get a discount.
In terms of the fees and costs, they will be slightly higher if you close on the house with a cash sale, and then refi. At least they were for me, because in one case I paid for an appraisal when buying and then the lender needed their own for the loan, an in another case I paid for a home inspection(with septic and radon) and then the leader needed the same.
I would say the process was more burdensome than getting a HELOC, but not as stressful as getting a purchase-money mortgage for your own home.
Originally posted by @Lenna Groudan :
However, this strategy cannot scale indefinitely! Actually, yes it can. This is one sure way to use the same money over and over again indefinitely.
- Are the total closing costs and lender fees significantly higher o effectively to this process in two steps? Step 1: Buy the house for cash. Closing costs don't include any lender related fees. Step 2: Refinance (70%-80% of the homes value) to get some of the cash out to purchase the next property. This depends on the lender. In my case, I have a one time $175 fee, or a maximum of $2800 in fees, depending on which program I'm using.
- Is this refinance going to feel more like a typical residential loan closing or does it feel more like a home equity loan process? Again, this depends on the lender. In the above options I use, the first one is a Loan of Credit and feels just like a LOC. The second is a refi, but it falls somewhere between a loan and a LOC in how it feels.
Hi Joe - thx for the reply!
My comment around not scaling was assuming we did NOT get our cash out. We would eventually run out. We are definitely hoping to scale by pulling money out of our cash purchases regularly...
I think you're on the right track. I've done this same thing with my properties.
Remember that by offering cash you should be getting a better deal than someone making an offer with financing (for the reasons you mentioned), so closing twice shouldn't really cost you more.
I recommend looking for properties that need just a little work, something obvious that's hurting value (something you can fix, like an outdated bathroom, not something sitting on top of the freeway). You can buy it quick with cash, do a little fix up and then get it appraised and then get even more equity out of it.
I checked my last HUD-1, the only closing costs I paid were for title, about $2k. In theory, you don't even need to do that, but having a warranty deed in hand will make the refi simpler. I recommend closing only with a warranty deed, title problems are the one thing that can completely derail a deal and some are really expensive/nearly impossible to fix.
The closing will pretty much be just like a residential purchase loan, they'll require all the same information to underwrite it, the only nice thing is there's no hard closing date constraint that makes everyone panic at the last minute.
Thanks to all - I think I've got the big picture!