Is the Ability to "Cash-out" Re-fi Part of Your Buying Decision

21 Replies

@Brandon Sturgill  I think this depends on your goals and what you are trying to do. I hadn't really taken that into account when looking at properties until very recently. It can be a good thing to consider if you are trying to build quickly, as he cash out re-fi will allow you to acquire more properties quicker.

I do consider the ability to cash-out refi with every property I buy, but that's because it is a critical part of my strategy.  As @Rodney Kuhl   stated, it just depends on your goals.

My model is to buy a distressed property at a discount, rehab the property, put a tenant in place, and then cash-out refi to pull all my money back out so I can do it again. I'm working local banks (portfolio lenders) which is also crucial to this strategy. I can refi for up to 80% of the appraised value after renovations with virtually no hassle (no seasoning requirements, no rehab documentation, quick and less expensive closing vs conventional, etc.). I just make sure I'm all in for less than the 80% of ARV and I can continue to build my portfolio with no money in a deal after the refi. Infinite ROI is great!

@Brandon Sturgill  , I use this strategy with SFRs but I would think you could do something similar in the multifamily space.  If you want to build a portfolio quickly, I think setting yourself up to be able to take advantage of cash-out refis to continually put your equity to use is a great plan.

@Jeremy Zindel  Do you have to wait for 6 months or a year to do your cash out re-fi or can you do it right away after rehabbing the property?

Originally posted by @Rodney Kuhl:

@Jeremy Zindel Do you have to wait for 6 months or a year to do your cash out re-fi or can you do it right away after rehabbing the property?

By using small local banks I am able to do it right away which is one of the main reasons I've chosen to go that route. I could get slightly better terms by going the conventional fannie/freddie route but I would have to hold title for 1 year (I believe, not positive) before I could do a cash-out refi. Plus I would have to hold title in my personal name vs being able to buy in the name of my LLC.

It's a trade off but the ability to continually turn my capital and get into other properties much faster without having to come up with an additional down payment every time is well worth it in my opinion.

@Jeremy Zindel  Thanks for the explanation! Do you buy them with cash originally or do you use conventional financing to make the purchase, then re-fi and pull all of the cash back out? And does that affect the time you have to hold before re-fi?

The reason I'm asking is I was told by a lender than you can re-fi after 6 months but only pull out 70% of the purchase price, then after a year you can pull out 70% of the new appraised value.

Originally posted by @Rodney Kuhl:

@Jeremy Zindel Thanks for the explanation! Do you buy them with cash originally or do you use conventional financing to make the purchase, then re-fi and pull all of the cash back out? And does that affect the time you have to hold before re-fi?

The reason I'm asking is I was told by a lender than you can re-fi after 6 months but only pull out 70% of the purchase price, then after a year you can pull out 70% of the new appraised value.

I started off buying and fixing up with a combination of cash, private money and credit cards, never conventional financing. After I did a couple deals like that and proved I knew what I was doing, one of the lenders I use actually started fronting me the purchase funds to take to closing on a signature loan and also set me up with a line of credit that I could use for the rehab. Then when we do the refi, he just zeros out that loan and line of credit with the new mortgage and we start again (as long as I'm below 80% of ARV). Not sure most lenders are going to be that generous but if you find the right one, build a relationship, and prove yourself, you never now.

Staying away from conventional financing keeps me from having to worry about how long I need to hold a property. The two local banks I use do not have any seasoning requirements for a cash-out refis. As long as the LTV ratio works, they don't care. I'm sure some portfolio lenders do have seasoning requirements but just ask around and see what's available in your area.

Those LTV and seasoning requirements your lender has sound like what I've been told for a conventional loan product. I'm sure some local banks have those types of requirements for their portfolio loan products but if so, I'd call around to different banks and see if you can find better terms if this is a strategy you want to pursue.

@Jeremy Zindel  Thanks! Sounds like a great strategy. And sounds like I need to find a lender who will let me do something similar so I can build up quickly.

Originally posted by @Rodney Kuhl:

@Jeremy Zindel Thanks! Sounds like a great strategy. And sounds like I need to find a lender who will let me do something similar so I can build up quickly.

Having great commercial lenders to work with has made all the difference in my REI business. Ask for a referral from other investors in your area and just shoot straight when you are talking to potential lenders. Tell them what you looking to accomplish and then ask what products they have that might be a good fit. If it's not a match, ask the lender for a referral. The guys in this space know what the other players are offering (at least in my market). In my case, I actually got hooked up with my best lender this way.

Originally posted by @Rodney Kuhl:

@Jeremy Zindel Thanks! Sounds like a great strategy. And sounds like I need to find a lender who will let me do something similar so I can build up quickly.

Also, one additional thing to keep in mind when considering how fast you can build. The commercial loan officers at these small local banks usually have lending limits that may come into play at some point. In the case of both lenders I have used, after I completed my third refi, my portfolio of loans with that bank had to be reviewed by the board of directors for approval to continue loaning me money. Not a big deal, your loan officer just has to justify to the board that he is making good loans and that you are a solid borrower. I also had to wait 9-12 months before they would issue my next loan. Just a seasoning period of sorts due to the fact that I was new to REI.

Anyway, just don't be surprised is something similar happens to you if you start growing rapidly.  I was caught off guard when the first bank told me that even though everything passed approval by the board, that I would still have to wait 9-12 months to do my next deal.  This forced me to go establish another lending relationship which is great because now I have two lending that I can use to build my portfolio.

@Brandon Sturgill    a lender like Jeremy is describing is tough to find.  I finally found somebody who would do a cash out refinance, with less than 12 months seasoning, based on appraised value.  I will stil be held to a maximum of 4 cash our refi's like most banks though.  It would be great to be able to that indefinitely.

@Jeremy Zindel  are getting 30 year fixed rate loans?

Originally posted by @Brant Richardson:

@Brandon Sturgill    a lender like Jeremy is describing is tough to find.  I finally found somebody who would do a cash out refinance, with less than 12 months seasoning, based on appraised value.  I will stil be held to a maximum of 4 cash our refi's like most banks though.  It would be great to be able to that indefinitely.

@Jeremy Zindel are getting 30 year fixed rate loans?

 No, definitely not 30 year fixed.  I don't know of any portfolio lenders that offer anything close to that.  10-20 year amortization with a 5 year balloon at 4.75-5.0% is what I'm getting and that is very typical in my area.

It's a little bit of a trade off but worth it in my opinion.  I just have to be that much more diligent about what I buy and how I spend money on the rehab so that I can still hit my cash flow criteria.

@Brandon Sturgill I do have great lenders. The one that gives me signature loans and the line of credit is exceptional, actually. I had to sort thru the 65-70% LTV banks in my area before I found the ones I work with now.

As far as the balloon goes, I'm confident that the banks I'm working with will renew those loans for the remaining term when the balloon come, so long as I am current (i.e. a 15yr loan with a 5yr would renew to a 10/5 at the end of the first balloon).  I asked a TON of question to the loan officers I work with about this subject to get a feel for how these types of loans fit into the bank's portfolio and if they were likely to be scared away from offering this product type.  Bottom line is the banks I'm working with like having these loans on the books and continued to offer them thru the last bubble burst in the late 2000's.

Still, playing the "what-if"/"worst case scenario" game, I finally rationalized to myself that if it came down to it, I would just sell the property if the lender did not want to renew my loan for the remaining term when the balloon came due. I already know I'm at 80% LTV max, plus the balance has been paying down for 5 years (and I'm on a 10-20 year amortizations so pay-down is occurring more rapidly than a 30 year). So worst case, if I had to dump it, I'm confident I could sell it fairly quickly to pay off the balance. And if for some reason the market tanked again and I was underwater on the property when the balloon came due, does the lender really want to foreclosure on a performing asset and take back an underwater property rather than continuing to collect payments??? I don't think so.

@Jeremy Zindel Great info. When i bought my first rental property a few months a go i wanted to do what you are doing. All i have found is 12 month seasoning periods. I have not even able to find a lender in my area that will do what you are doing. You have spurred me on to go shopping! I believe it's to important a component to REI to not have this piece sorted out.

@Jeremy Zindel  

Thanks for your posts.  Your model is identical to my own!  I have a couple of smaller bank portfolio lenders who I work with to do the exact same thing you're doing!  So many people get stuck on the idea that all banks require seasoning and it's just not the case.

Congratulations my friend, we are on our way!

Originally posted by @Rich Nickel:

@Jeremy Zindel Great info. When i bought my first rental property a few months a go i wanted to do what you are doing. All i have found is 12 month seasoning periods. I have not even able to find a lender in my area that will do what you are doing. You have spurred me on to go shopping! I believe it's to important a component to REI to not have this piece sorted out.

If you are wanting to do this type of strategy then you definitely have to have a portfolio lender on your team.  With the 12 month seasoning requirement, you may be dealing with lenders that are trying to create conforming loans that they can sell on the secondary market (i.e. fannie/freddie loans).  Some portfolio lenders do still have seasoning requirements but not all.  You need to find a bank that is going to keep the loans on their books (i.e. a portfolio lender) so they don't have to follow the conforming guidelines.

Whenever you go looking for a lender that you can work with, focus on the small local banks and credit unions. The guy you are going to want to talk to probably has the title of Commercial Lending Officer or VP of Commercial Lending. Even is you're just wanting to get a loan on and SFR, it's still technically a "commercial" loan.

Good luck in your search!  They're out there, you just have to put in the work find them and then nurture the relationship.

@Robert Leonard I'm glad someone else is having success with this model.  I feel like sometimes people think I'm stretching the truth when I explain what I'm doing and what commercial lenders are willing to do.  It just proves that these banks are out there if you will just seek them out and develop the relationship.

Yes indeed, on our way is right!

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