How soon after closing escrow can you get a cashout refi?

33 Replies

Hi guys!  A little about me, I have been lurking around BP for about a year, listening to the podcasts and reading blog posts.  I saved up some money over the last couple years and just put an offer for 25% down on an awesomesauce property from Roofstock. I'm stoked to start learning more as everything related to renting that property unfolds.

Here's my background:

I make about $45,000 a year, sometimes more (I'm a personal trainer in Los Angeles) and my goal is to buy ten properties minimum over ten years. All around 100k-150k in different cities. I love Roofstock's set-up, it makes it easy for me to buy in a more affordable market than LA with tenants and options for property management and financing in place.  I figure over ten years I'll be able to purchase five properties with 25% down while simultaneously getting a cash out refinance on those five properties to buy five more. That's where I'm starting anyways-as I learn more I'm sure my strategy will evolve. 

If I cannot qualify for those loans I plan on partnering up with my boyfriend and being the capital while he helps me cosign as together we make over 100k.

So, here is my question:

How soon after closing escrow on a rental property with 25% down can I cash out refinance for another rental property? And if I apply for another 100k rental property, what's the likelihood I'll get the loan with $50,000 income and two mortgage payments (both paid by tenants)?

How realistic is my plan?  Any feedback is appreciated from those that've been doing this longer than me!

I'll also add that the loan I took out is a 30 year fix conventional loan.

You Are Ambitious!  I love it!!  I feel your excitement.  It's great.

You bring up a few different points, so I want to address them one by one.

Unless you are looking at private money or hard money lenders (who make up their own rules), many conventional lenders won't refinance for a cash out until you have held the property for 6 months.  Additionally, they would still want to see equity, so getting 100% of your money back in a cash out is slim to none.  

In terms of you qualifying for multiple properties, your quickest and most efficient way of doing this is using OPM (other people's money).  What I mean by this is using the rent roll to offset your debt to income ratio.  After the property has been on your taxes for 2 years (in some cases 1 year), the net income counts toward your overall income.  So, when you go to qualify for a new property, you are just qualifying on THAT property, not both.  Does that make sense?

A quicker way of doing this would be to purchase a property with tenants already in place.  To many lenders, if the property already has a proven track record with tenants, they will allow you to use that income to offset the debt to help you qualify for the property.

Another thing to consider would be putting 20% down instead of 25% down.  If timing is your biggest hurdle for building your down payment up, then it may be worth the slight interest rate bump you will see from slightly lessening your down payment.

Lastly, I would recommend HEAVILY, that if this is your first experience with real estate investing, you slow down just a beat and allow yourself to learn about being a property owner and manager before jumping in to several properties that teach you the lesson in an extreme way.  You may find, after your first one, that you don't like the type of property you purchased, or the price point, or the area.  If that's the case, it's alot easier to recover from 1 property versus 5 or 7 or however many that came too quickly after that first 1.

Thank you so much for your reply, all of that input helps a lot! You have a lot of knowledge on this stuff and I just learned a few things that will definitely help me :)

I am excited, my goal for a long time has been hurry up and invest now and then later go explore life with a financial safety net. Travel, go backbacking for a month etc. I have always invested in index funds and there's a big place in my heart for them but had no idea how to use leverage to make some of my money go further and that's very cool to me. Blows my mind.

As far as getting a cash out refinance from a conventional lender and waiting six months, I don't mind at all. I agree with you that I should get my sea legs and a lay of the land before buying another property, I figured maybe I'd try to buy one a year to start. I just didn't realize I could refinance even six months after buying a new home. That's pretty amazing, I figured you'd have to wait a few years and build the equity yourself that you'd want to pull out. I'm thinking I'll go for a refinance about twelve months (or more depending) after the purchase and then use some of my own savings to put 20% down on my next one (another good suggestion that'll get me closer to another property sooner).

Also, I didn't know about using OPM, thank you for bringing it up!  I don't own my own property in LA, neither do I want to for now, and so any property I'd own would have (hopefully good) tenants. Roofstock properties come with a vetted tenant in place (for example the tenants that live in the property I purchased have lived there since 2008) so that's good news if that's what I need to buy another one when the time comes.

Lastly, thank you for your advice to observe and evaluate how this land lording thing in Memphis is going before jumping into my next purchase. I'll try and wait a year in between to see what happens, how much repairs come up, what my cash flow really is and see how the property managers work out. I don't think at this point I'm clever or brave enough to do more than one deal a year, and as time goes on we'll see if I pick up steam :)

Thanks Cara, I really appreciate the response!

I think you have a good plan in place. 

To clarify, the lender who refinances your property will still need to see equity, but often times sales comps have increased enough to show the required LTV so that you can take out your original purchase money.

Also, I am glad to hear that you hold other investments. They can actually help you too! There are many IRAs that can be converted into self directed REITs. This would allow you to use your IRA funds to purchase real estate. Additionally, if you have the ability to take out a loan against your investments (many 401Ks offer this), you could reach your down payment figure quicker by using those funds.

It looks like you have many options to explore.  I hope these ideas help.

You’re buying TK properties at 75 LTV. That means you’re getting a loan for 75% of the value (or sale price) of the home. You can do a cash out refinance when there is equity in the home beyond 75 LTV. So in order to do a cash out refi you’re going to need to value of the home to go up, either through appreciation or through improvements. In most places where TK operators are selling there is not appreciation like what you see in CA. Improvements cost money. So what you’re doing by putting 25% down on those properties is trading the 25% down for the cash flow you’re getting. You don’t have a way to do a cash-out refi unless you add value. That’s why some people prefer to do value add or BRRR investing instead of buying TK. There is nothing wrong with your strategy, it just requires putting down 25% a lot of times. So if capital is a lacking factor you’re going to be limited in growing your portfolio. I hope that makes sense and good luck to you!

Thank you, that does help. I have a normal, non-retirement index fund however I also have a Roth IRA and I'm glad to hear I can convert it into a self-directed REIT and buy a property that way because I'd rather not eat the 10 percent fee to pull it out unqualified. I'll have to keep that in mind down the road. i don't have a 401k but I wonder if I'm able to pull from my index funds tax free if I roll them into an investment property. I also could start an individual 401k since I technically am my own business which may help me with taxes down the road if I can take a loan against it. I'll have to ask my advisors on that one and I'll ask about the Roth conversion as well.

Question-in regards to a lender having to see equity in the home, how much equity would they need to see? The home I'm in the process of owning is $91,000 and I put 25% down, or $22,750.

Lee, thank you for your response! That does get me thinking. I have been interested in BRRR investing, though it seems a little more complicated than buying a fully set-up turnkey property which is why for my first investment I started there. Capital is definitely a lacking factor for now...maybe as I get more familiar with the property managers and realtors and contractors in Memphis I could buy my own fixer upper in the same area...too bad LA doesn't have $100,000 properties! I would love to live near my property, manage it myself, renovate it myself, etc. etc. Maybe when I strike it big or can do a 1031 exchange into a property closer by. Would be a lot easier lol. And no, the appreciation on this property is probably 1.8%, so not a lot of luck in it appreciating over 75 LTV quickly.

I had never heard of Roofstock, so I pulled up their website. I randomly chose one of the properties in Indianapolis that they have listed for $87,000, and then pulled it up on Zillow. I see that they bought it for $4100 and the Zestimate for value is $72,000. So I think there is a lot of trouble looming with these type of properties. I would never, never want to invest in neighborhoods where houses sell for $4100. There was a post recently from a woman who bought a turnkey house in Memphis and her first tenant turnover cost $4900 in damages. And you will probably never be able to refinance and pull any cash out of these properties because you are buying at the highest value in the neighborhood, and the banks will never appraise it for what you paid. Sorry to be the bearer of bad news. Be careful.

Hi Sarah! Yikes, I will be careful. I figure I'll learn as I go along. I pulled up the zestimate of the property I put an offer on and it's (thankfully) more than I paid for it and less expensive than the comparable homes around it. It will definitely need repairs when new tenants move in, the homes on roofstock come with undated inspection reports.  I also picked a property with a high irr and high cap rate, better than any of the current properties listed on there. I figure the good deals get scooped up fast.

In the future I would like to purchase, renovate, and rent my own property through a realtor but for this first one I wanted to see how my investment would turn out. If anything comes up I'll definitely post it on this thread!

You can get 100k properties in Yucca Valley, Joshua Tree, and Twentynine Palms. You also can in California Valley and perhaps Bakersfield.

I do value-add investing remotely but it takes a lot of my time and wouldn’t recommend it as a “hands off” approach.

Originally posted by @Sarah Purdum :

Hi Sarah! Yikes, I will be careful. I figure I'll learn as I go along. I pulled up the zestimate of the property I put an offer on and it's (thankfully) more than I paid for it and less expensive than the comparable homes around it. It will definitely need repairs when new tenants move in, the homes on roofstock come with undated inspection reports.  I also picked a property with a high irr and high cap rate, better than any of the current properties listed on there. I figure the good deals get scooped up fast.

In the future I would like to purchase, renovate, and rent my own property through a realtor but for this first one I wanted to see how my investment would turn out. If anything comes up I'll definitely post it on this thread!

Remember, "yikes"! And please, pay ZERO attention to "zestimates". Refer back to sold comps only! eg. $4.1k*. 

* [The trouble is: Roofstock are trying to springboard their comps to include your over-the-odds buy!] Good luck...

@Brent Coombs That is an excellent point, that turnkey providers are probably creating their own comps in these neighborhoods. I’m curious about that. Is that good for these neighborhoods? Or dangerous for investors? Both? 

@Sarah Purdum What city are you purchasing in this first time? I’m relieved to hear that your numbers look better than the one that I randomly selected.  I am always wary of helocs because I have always been disappointed when I have tried to use them. It seems like the appraisals are super conservative compared to a purchase, and you can never get the numbers that you want. But once you go to sell, it magically appraises when you have a signed purchase contract. I did a new construction project two years ago that appraised for $350,000  at the beginning of the project, and then we sold it for $585,000. We are in a high-end market, and our problem is that people pay a significant premium for new construction or completely renovated homes, but appraisers will really take that into consideration. They seem to focus on simply like square footage and house style within a small radius. We have always been able to sell for significantly more with our renovated houses. In a low-end market, I think the foreclosures and houses in very poor condition sell at a significant discount, and hurt your appraisal that way. In any regard, I would not count on getting any of your money out of your turnkey houses for a very long time. But if you want to buy something in the Detroit area, let me know and I can connect you with some people who wholesale and let you know which suburbs are a good bet. I used to live in Wayne County.

Hi Sarah, 

If you don't own the home in which you are currently living have you given any thought to getting your feet wet by house hacking. You can purchase a 1-4 family through FHA and if you lived in one of the units your down payment would only be 3.5%. There a tons of blogs on this website about it and it would give you some very beneficial landlord experience. If you get the chance listen to BP Podcast 249, It's about House Hacking

House hacking in LA with an income of 100k without very significant savings (>200k) is not possible!

Does Roofstock provide the initial purchase loan or are you using a traditional bank for the purchase? If you are using traditional bank then they will preform an appraisal and the bank won't loan more than 75% of the appraised value. Therefore you have a little safety net, just make sure your deposit is refundable if you can't get favorable financing.  

Originally posted by @Sarah Purdum :

Hi guys!  A little about me, I have been lurking around BP for about a year, listening to the podcasts and reading blog posts.  I saved up some money over the last couple years and just put an offer for 25% down on an awesomesauce property from Roofstock. I'm stoked to start learning more as everything related to renting that property unfolds.

Here's my background:

I make about $45,000 a year, sometimes more (I'm a personal trainer in Los Angeles) and my goal is to buy ten properties minimum over ten years. All around 100k-150k in different cities. I love Roofstock's set-up, it makes it easy for me to buy in a more affordable market than LA with tenants and options for property management and financing in place.  I figure over ten years I'll be able to purchase five properties with 25% down while simultaneously getting a cash out refinance on those five properties to buy five more. That's where I'm starting anyways-as I learn more I'm sure my strategy will evolve. 

If I cannot qualify for those loans I plan on partnering up with my boyfriend and being the capital while he helps me cosign as together we make over 100k.

So, here is my question:

How soon after closing escrow on a rental property with 25% down can I cash out refinance for another rental property? And if I apply for another 100k rental property, what's the likelihood I'll get the loan with $50,000 income and two mortgage payments (both paid by tenants)?

How realistic is my plan?  Any feedback is appreciated from those that've been doing this longer than me!

 If you are already buying it on a loan what are you trying to refinance into? Unless you buy it dramatically under value your not going to refi into another loan and pull that 25% out. There are no zero money down residential non owner occupant loans.

@Sarah Purdum I don’t think your goals are close to impossible or far off, during my search for RE investments, I found out that lenders typically go out up at 25% in non mega cities and 20% in megas like SoCal. Do it might take time for you to jump from 1-2-4-8-16. However, I also found out that conservatively, you can do double jumps every 2 years, depending on experience, how you handle finances, etc, aggressively, 1-1.5 years you can at least double. After your 10th property with FHA, you can go and scale to larger ones such as apartments or have portfolio. The first 4 will take time, the rest is history. Unfortunately, I can’t imagine myself working hard and having headaches for 200-400/door, my time is better served elsewhere so I gave up drip income searching.

Usually right after closing you can do rate and term.  But about 6 months after closing you can also pull cash out.

If you need more help just PM me...

Peter Vekselman

I recently heard of FHA loans providing a 2 month cash out refi option

I have not had any time to research this but you obviously will need equity going into it 

Originally posted by @Sarah Lorenz :

@Brent Coombs That is an excellent point, that turnkey providers are probably creating their own comps in these neighborhoods. I’m curious about that. Is that good for these neighborhoods? Or dangerous for investors? Both? 

I believe the answer is: Dangerous to investors! 

[ie. Only good for the turnkey provider, and any other seller who uses the same tactic on out-of-state sitting ducks].

Maybe I'm being over-dramatic to make my point, but please, try to ask all the questions (to locals) that locals do!

Originally posted by @Jason Carlisle :

I recently heard of FHA loans providing a 2 month cash out refi option

I have not had any time to research this but you obviously will need equity going into it 

Though I'd be very surprised if they lowered the equity requirement of 20% before you could do so.

If I'm not wrong about that, good luck going from 3.5% equity, to 20%+ equity, in just two months!

Originally posted by @Sarah Purdum :

Hi Sarah! Yikes, I will be careful. I figure I'll learn as I go along. I pulled up the zestimate of the property I put an offer on and it's (thankfully) more than I paid for it and less expensive than the comparable homes around it. It will definitely need repairs when new tenants move in, the homes on roofstock come with undated inspection reports.  I also picked a property with a high irr and high cap rate, better than any of the current properties listed on there. I figure the good deals get scooped up fast.

In the future I would like to purchase, renovate, and rent my own property through a realtor but for this first one I wanted to see how my investment would turn out. If anything comes up I'll definitely post it on this thread!

The inspection reports on Roofstock are dated at the top of each report. Definitely do your due diligence by researching the area and doing your own comps. As others have said, refinancing the current purchase to be able to pull out enough money to pay for the down payment on a second investment property is likely to be unsuccessful. That is a strategy that typically works with BRRRR, when buyers buy properties significantly under value but in need of a lot of rehab work. Realistically speaking you are going to probably have to save up the down payments on each investment property. You will likely be able to refinance down the line, but we are talking many years as the properties appreciate in value over time.

I'm in the process of doing basically what you want to do. I bought a duplex for 188.5k, put 20% down on a fixed rate 20yr. I upped the price of rents, (dramatically low) both tenants moved out in the same month & I did a lot of rehab in the lower unit, not as much in the upper unit. I have the units full and renting at 1300 & 1100/mo. I'm getting an appraisal done to see the arv, but I'm pretty sure I have to wait until the 6 month window is up before I can do a cash out refi. I was thinking of doing a HELOC which they will do up to 90%, but if i wait another 2 months the cash out refi will allow me to purchase another property without having to leverage a HELOC so heavily on a 10yr loan.

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