Receiving a cash out loan on an investment property can be a very confusing item. This post is designed to bring some clarity to taking cash out of a property with a conventional loan and help you navigate the sometimes-challenging cash out rules for properties. Admittedly, this post will probably be for the mid-level to expert level investor. There could be some important items in here if you are just starting out but it might get confusing in a hurry. If you have any questions, then please reach out. Lots of people on this forum can answer questions and many are very helpful individuals.
We will cover:
- The conventional rules for a cash out loan
- Buying a home with cash
- How to properly structure buying a property with cash
1. The Conventional Rules For a Cash Out Loan
Fannie Mae and Freddie Mac are the Government Agencies that sponsor conventional lending. Most banks will have these loans as an option. There are other loan types as well but for brevity we will limit this post to the “Conventional” lending (Fannie/Freddie).
- Conventional Loans limit your cash out on an investment property to 75% of the “After Repair Value” on a Single-Family home (70% on a 2-4 unit home). This is also the same percentage that you need for a non-cash out refinance (more on why that is important later).
- If you purchased the investment property with a loan, then conventional loans will require you to wait 6 month to take cash out.
- This rule does not apply if you purchased the home with CASH (more on that in section 2).
Let’s explore some examples here:
- If you purchased a property with a 15% down conventional loan (85% loan to value) and you wanted to get cash out, you wouldn’t be able to do so since the cash out limit is 75% of the “Loan to Value”. The MAXIMUM cash out you can receive is 75% of the value of the property.
- If you purchased a property with a loan, but did the rehab on with your own cash, then you would need to wait 6 months to get that cash back. Keep in mind you could only receive 75% back of the After Repair Value.
- So if you bought a home with a loan of $50k, it required $30k in renovations, and it appraised for $100k after the repair work was complete then….
- You would refinance the $50k loan, receive back $25k in cash…since $75k would be 75% of the After Repair Value.
2. Buying a home with Cash
Buying a home with cash has become increasingly popular for many investors but often an investor will be caught with the restrictions to cash out loans if they need to get their money back. There is a plan to avoid this entire section (In section 3) but it is important for us to know about these restrictions. If an investor is buying with cash and flipping they get their money back when they sell the property. But if they are seeking to hold a property for any length of time and want their cash investment back there are some important rules to understand with conventional loan:
- If you buy a property with cash (or with a HELOC) you can receive a cash out loan on Day 1.
- There is not a 6 month waiting period with receiving a cash out loan if you purchased a home with cash or with a HELOC
- BUT you will be limited to the amount of….
- Your purchase price + closing costs (costs when you purchased the home)
- 75% of the “After Repair Value”…
WHICHEVER IS THE LOWER AMOUNT (super important)
These rules are important to understand so here are two examples:
- Example 1: If you purchased a home with $50k of cash, and put $30k of renovations into the loan, and the home was worth $100k. 75% is $75k and $50k is your purchase price. So you could only receive $50k in your first 6 months of ownership since the LOWER amount is your purchase price. After 6 months you could receive the full 75% of the ARV.
- Example 2: If you purchased a home with $80k of cash, put $5k into the home, and the home was worth $100k. 75% would be $75k and your purchase price is $80k…so the lower amount is $75k.
When buying a home with cash you can absolutely get cash back right away but you will be limited to the lower of those two amounts.
3. HOW TO PROPERLY STRUCTURE BUYING A HOME WITH CASH
With these rules, you can see how it can be confusing to get conventional lending when buying a home with cash but there is absolutely a proper method to structuring your deals when buying cash. Here’s the secret:
- Create an LLC and have the LLC lend you a mortgage on the property you are receiving.
The reason why this works is because instead of you needing cash or receiving a cash out loan, we are now refinancing a loan – your loan. There no reason to wait any time or have any “whichever is lower” rule come into play. We are just refinancing a loan.
Here’s how it works:
- You create an LLC
- You buy a home
- Your LLC gives you a loan for the home
- You file the deed for that loan at the county courthouse
- You use the money from the LLC to buy and fix up the property
- Once the property is completed, your conventional lender comes to refinance the loan
- Your conventional lender runs title and sees there is a loan.
- Your conventional lender refinances you into a new loan, and cuts a check to your LLC…a check in the amount of 75% of the value.
Please don't confuse this 75% with a "cash out" amount. The non-cash out LTV on a refinance is also 75%. We are refinancing a mortgage. Your LLC's mortgage. Essentially your LLC has become the bank/hard money lender/etc. However you want to think about it. You get to set the interest rate (it can be 0%) and you get your investment amount back sooner.
Some things to think of:
- To file a deed at the county courthouse is $100-$150 in cost (depending on which county)
- And you want that note to be pretty close to 70% of the ARV for the property if you don't want to bring any money to closing. 70% will allow you to roll in your closing costs. If you want it to be at 75% just keep in mind you would need to bring your closing costs out of your pocket to complete the refinance.
This was a lot of information. Feel free to ask additional questions if you need. Thanks!
@Andrew Postell thank you for posting this. Great info and well put together. All the best to you.
Thanks @Jorge Ruiz ! Greatly appreciated sir!
This is very informative. Thank you.
@Andrew Postell Thank you, this was helpful!
Great information as I just went through this on a triplex. Make sure your dti is inline, and you shouldn’t have issues with a refinance. You need some cash reserves, to show income, and obviously at least 30% equity.
They are going to mail you on fees though.
Amazing info. Thanks for the share.
i just recently bought a rental for 32k without a loan, and want to cash out. i was told by several local lenders that I need to wait 6 months before they can do a cash out refi. i told them that i only looked to get my purchase price amount back from the cash out refi. They still said i needed to wait 6 months. I will continue shopping around this coming week. Any idea what rate i can expect on small cash out loan, length of loan, etc? I appreciate the help.
@Adam Drummond I'd keep searching, there is probably someone local who will do a cash-out for you with less seasoning.
I was getting the same thing with a couple properties in Milwaukee, but then I found a credit union that will do the cash-out with only a month's worth of seasoning. Should be starting that process within the next week.
Do you mind sharing the name of the credit union and perhaps the contact person there?
I am looking to start investing in Milwaukee very soon and would appreciate the help.
All the best to you,
@Jorge Ruiz Sure thing! It's Educator's Credit Union. I've been talking to Vanessa. Don't have her number, just called through the main line. It's a 5 year ARM loan package, 80% LTV (appraisal value, which is sweet). Technically they don't have any seasoning period, but they say to give it a month so that the underwriters don't get suspicious.
@Adam Drummond this post is designed for the "conforming, conventional" loan types that face this 6 month cash out restriction. There is an entirely different loan type that I will call "portfolio" (sometimes referred to as commercial loans) that may not have any restrictions. "Portfolio" loans come from the bank's own portfolio of money...thus the name. So the bank may not have a 6 month requirement but they also may have MORE of a requirement. Since each portfolio loan is governed by the bank itself you would literally have to call every bank out there to find out all the different portfolio loan options. However, most will not lend on such a small loan amount that you have. Most banks won't lend conventional money that amount either...but some will. My recommendation is to seek out a bank that would lend that small on a conventional loan and then perform step 3 above. Hope that helps!
What an outstanding post! Thank you Andrew for taking the time to write this.
@Account Closed Sure thing, so I am going with the ARM because we can pull 80% out instead of 75% with the method described by Andrew. Plus it is less complicated to pull off.
@Taylor Chiu got it, thanks!
@Andrew Postell Great info and very timely for me. Thank you!
Thanks @Andrew Postell , incredibly clear and informative. I just found out about that "whichever is lower" restriction on the Delayed Financing Exception today from my lender. One question:
Are lenders typically wary of this strategy? My lender was pretty adamant about going by the book on the seasoning period. Anyone have a barometer as to whether lenders are enthusiastic to lend at a much higher velocity simply because there's an existing loan?
I would love to use this strategy but want to make sure I don't look like I'm pulling the wool over their eyes.
Any thoughts much appreciated! Thanks all.
@Brian Bistolfo this post concerns "conforming, conventional" loans...essentially Fannie Mae and Freddie Mac loans. The bank actually has no say in this rule for this loan type. The bank MUST follow this guideline. It might sound weird but they can be MORE strict than this if they wanted to but not less strict (I've seen 12 month seasoning requirements before).
However, a "portfolio" loan could be different. A portfolio loan is a loan that comes from the bank's own portfolio of money - thus the name. So the bank makes the call. These loans could be easier to qualify for but the terms are different than a conventional loan. Sometimes the rates are adjustable, sometimes they are higher rates, sometimes these are 15 year loans....and often they are all three of these. And since the bank makes their own decision on their own money...each and every bank will have slightly different loan rules. You would literally have to call each and every bank to find out the rules to each and every portfolio loan out there.
In generally, if you are doing your first 10 properties with a loan on them we want to use Fannie/Freddie money. let me know if you have any other questions. Thanks!
Thanks for the detailed reply @Andrew Postell , that's very helpful. So, to clarify; are most lenders willing to do a Fannie/Freddie cash-out refi if you've gotten around the 6-month seasoning period by writing a mortgage note to yourself via your own LLC?
@Brian Bistolfo thank you for mentioning the LLC thing. Super important. The rule is that you need to be on title for 6 months. You as an individual. Fannie/Freddie require their loans close in your name with your name on the deed. So, if you have to wait ANOTHER 6 months to do that, then the original posting is a good alternative. Hope this helps but feel free to ask more questions if you need. Thanks!
@Andrew Postell Getting this through my skull does seem to be proving difficult :) Would going the LLC route allow me to (in theory) purchase a property December 1 2017 and refinance at 75% of appraised value on, say, Feb 1 2018 after rehab and tenant placement? It sounds like you're saying that there's still a Fannie/Freddie restriction that would disallow that since at most I've been on title for 3 months at that point...or that it'd be the LLC's name on the title rather than mine, so I'd still need to wait another 6 months.
Meant to tag @Andrew Postell above.
@Brian Bistolfo are we confusing with purchasing a property in a LLC name and lending a mortgage with a LLC? It might be easier to PM each other but just in case I am speaking if you needed cash in the first 6 months of being on title (usually after you buy). Fannie/Freddie will not lend to a property with a LLC. Fannie/Freddie will also not provide cash out loans in the first 6 months of someone being on title. The whole sticking point here is "cash out". So if you didn't cash out....if you just refinanced...then there's no waiting. So rather than buying with cash, you are going to get a mortgage, from your LLC. Rather than using a hard money lender, your LLC will be your lender. I hope that makes more sense.
@Andrew Postell yes, thank you very much. In that case sounds like this is my strategy. Happy to talk further via PM.
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