How To: Cash out 1-4 unit Property

[Andrew Postell]

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:

1. The conventional rules for a cash out loan
2. Buying a home with cash
3. 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)
    • OR
    • 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]

@Caitlin Faulk thanks for the questions.  We absolutely still use this strategy today.  Here's the answers to your questions:

1. Now recommended, funds actually transfer from LLC account - Yeah, more and more lenders want to see this...it's still not a Fannie/Freddie requirement but let's just work within this and that will allow more lenders to help you refinance. If you are operating an LLC, and using it for your business, then the right move is to fund your deals through your bank account anyway...so maybe it already fits with what you are doing.

2. Rehab amount listed on HUD and kept in escrow (but held back)? Can you further explain why this is necessary? - Oh, let me clarify here just in case - there is an ALTERNATIVE strategy that lists the repairs on the HUD....that strategy is inferior to filing the lien. So you pay with cash and list your repairs on the HUD. That's not what we want to do here. I don't want to confuse that strategy with this. Now, sometimes with filing the lien the title company will say something like "Hey, you are purchasing this for $100k...but we are filing a lien for $150k...we need to balance this figure so where is the rest of the money?"  And in that case, you tell the title company, "The lender is holding the repairs back in their account and will issue the funds upon draws (or held in the lenders OWN escrow account)" .  This is EXACTLY how a hard money lender does it.  They give you a higher loan than your purchase price (usually) and hold the repairs back in escrow.   I hope that makes sense how I am describing it.

3. Note and lien filed by LLC at 0% interest, 12 month term, balloon payment = purchase+rehab - Correct.  And this amount should coincide with the amount of a loan you are prequalified for with your Refinance step lender.  So no filing of a loan OVER your prequalification amount....because then you would not be able to get a loan high enough to cover the difference. 

This is a Fannie/Freddie strategy, so the borrower is named individually. The LLC can be owned by anyone really. But Fannie/Freddie do not lend to any LLC ever - if that's what you are asking. So, LLC owned by the borrower or by someone else is totally fine even if that someone else is your spouse.

Thanks again!

[William Manning]

2. Rehab amount listed on HUD and kept in escrow (but held back)? Can you further explain why this is necessary? - Oh, let me clarify here just in case - there is an ALTERNATIVE strategy that lists the repairs on the HUD....that strategy is inferior to filing the lien. So you pay with cash and list your repairs on the HUD. That's not what we want to do here. I don't want to confuse that strategy with this. Now, sometimes with filing the lien the title company will say something like "Hey, you are purchasing this for $100k...but we are filing a lien for $150k...we need to balance this figure so where is the rest of the money?"  And in that case, you tell the title company, "The lender is holding the repairs back in their account and will issue the funds upon draws (or held in the lenders OWN escrow account)" .  This is EXACTLY how a hard money lender does it.  They give you a higher loan than your purchase price (usually) and hold the repairs back in escrow.   I hope that makes sense how I am describing it.

 Wow, just wondered about this myself. 

Thank you again for all you and your team have done to help me through the process for the first time doing this strategy. Y'all don't know how much that really meant to me. I'll be sending the next refi your way as well.

I simply can't thank you enough Andrew.

[Andrew Postell]

@William Manning thank you sir! Very glad to see so many people use this strategy.

[Caitlin Faulk]

Quote from @Andrew Postell:

@Caitlin Faulk thanks for the questions.  We absolutely still use this strategy today.  Here's the answers to your questions:

1. Now recommended, funds actually transfer from LLC account - Yeah, more and more lenders want to see this...it's still not a Fannie/Freddie requirement but let's just work within this and that will allow more lenders to help you refinance. If you are operating an LLC, and using it for your business, then the right move is to fund your deals through your bank account anyway...so maybe it already fits with what you are doing.

Just to understand the proper step (in my circumstance)…

- Heloc funds transferred to LLC account (marked personal injection of funds).

-Funds transferred to title from LLC for closing. Rehab costs held back in LLC, but noted as "escrowed" on HUD. Rehab funds distributed in draws to personal account.

To file the LLC's mortgage note here in FL it costs .35/$100. I'm assuming there isn't a way around this?

Thank you!
 

[Andrew Postell]

@Caitlin Faulk yeah, those steps are all good to me.  And yes, it must be filed. So whatever the payment is you'll need to pay it to follow this strategy.

[Matt Wells]

@Andrew Postell This post really helped me out a lot. Can you point me to where it says on the Fannie Mae and Freddie Mac websites that delayed financing can be used for investment properties? 

[Andrew Postell]

@Matt Wells thanks for reaching out. So this is a little hard to do. Western methodology to law is usually dictated by what is NOT allowed...and not what IS allowed. Meaning, can anyone show you where it says driving 30 miles per hour in a 35 MPH zone is legal? And the answer is no. Because the way law is written is that it only states what is PROHIBITED. So driving OVER 35 miles is against the law. Same in this regard too. Fannie/Freddie do not have any language to what is allowed....because if it is not prohibited - then it's allowed. So a cash out loan is NOT allowed within the first 12 months of ownership now - period. They don't list which properties or anything. That's just the rule. However, the "Delayed Financing Exception" allows you to get your initial money back - period. Again, no listing of properties, DTI, etc. That's just the rule. So it's allowed UNLESS they say it's prohibited. Writing a "Delayed Financing Exception" loan is allowed on all properties - because they do not have any language stating it's prohibited. I hope that makes sense how I am describing it.

[Matt Wells]

@Andrew Postell Yes, it makes perfect sense. Thanks! I did review the guidelines and I get it now. They sure do make it difficult to understand! 

[Steven Gee]

Quote from @Andrew Postell:

@Caitlin Faulk yeah, those steps are all good to me.  And yes, it must be filed. So whatever the payment is you'll need to pay it to follow this strategy.

Hi Andrew, thank you so much for sharing this amazing strategy to the community! This may be a stupid question but I am in the process of closing on a property, 2 days from closing. Do I (as an LLC) need to reach out to the title company that the LLC actually loans me money to purchase and rehab the property, so they can file it in the HUD statement?

[Andrew Postell]

@Steven Gee thanks for the message.  Greatly appreciated.  There's a lot to what you are asking so I'll try to break it down one at a time:

1. Are you prequalified for a Fannie/Freddie type of loan?  This strategy only works with Fannie/Freddie so if you are using a different loan type then there's no reason to do anything really.

2. Does the math even warrant you filing a lien?  There's plenty of scenarios where you can just refinance with no waiting.

3. Is this property a 1-4 unit property?  If so, then it works...because that's the only properties that Fannie/Freddie lend on.

4. Do you already have your funds in your LLC bank account? This post if over 5 years old now...lots has changed in that time. Most lenders that know this strategy want your LLC to fund the transaction which means you need to have the funds in your LLC bank account. That's the current lending environment.

[Steven Gee]

Quote from @Andrew Postell:

@Steven Gee thanks for the message.  Greatly appreciated.  There's a lot to what you are asking so I'll try to break it down one at a time:

1. Are you prequalified for a Fannie/Freddie type of loan?  This strategy only works with Fannie/Freddie so if you are using a different loan type then there's no reason to do anything really.

2. Does the math even warrant you filing a lien?  There's plenty of scenarios where you can just refinance with no waiting.

3. Is this property a 1-4 unit property?  If so, then it works...because that's the only properties that Fannie/Freddie lend on.

4. Do you already have your funds in your LLC bank account? This post if over 5 years old now...lots has changed in that time. Most lenders that know this strategy want your LLC to fund the transaction which means you need to have the funds in your LLC bank account. That's the current lending environment.

Thank you for getting back to me! I actually just closed on this property today lol.

I should be able to do conventional with Fannie. This new property's rehab is going to be over $50k so that's why I'm looking to get cashout on it without having to wait the full 6 months. It is a single family residence and I have funds ready in my LLC account.

[Yocheved Beer]

Quote from @Andrew Postell:

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:

1. The conventional rules for a cash out loan
2. Buying a home with cash
3. 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)
    • OR
    • 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!

 thank you so much!

I plan on doning this in nj. Do you know anyone in nj that will do this?

[Andrew Postell]

@Yocheved Beer I mean, I can.  Feel free to reach out if you want to talk this through.

[Matt Wells]

Quote from @Andrew Postell:

@Matt Wells thanks for reaching out. So this is a little hard to do. Western methodology to law is usually dictated by what is NOT allowed...and not what IS allowed. Meaning, can anyone show you where it says driving 30 miles per hour in a 35 MPH zone is legal? And the answer is no. Because the way law is written is that it only states what is PROHIBITED. So driving OVER 35 miles is against the law. Same in this regard too. Fannie/Freddie do not have any language to what is allowed....because if it is not prohibited - then it's allowed. So a cash out loan is NOT allowed within the first 12 months of ownership now - period. They don't list which properties or anything. That's just the rule. However, the "Delayed Financing Exception" allows you to get your initial money back - period. Again, no listing of properties, DTI, etc. That's just the rule. So it's allowed UNLESS they say it's prohibited. Writing a "Delayed Financing Exception" loan is allowed on all properties - because they do not have any language stating it's prohibited. I hope that makes sense how I am describing it.

@Andrew Postell This just caught my attention. "Delayed Financing Exception allows you to get your initial money back - period. Again, no listing of properties, DTI, etc." When you mentioned DTI here, are you saying the lenders don't look at DTI for delayed financing? Or am I reading this wrong and just hoping that's the case?

[Andrew Postell]

@Matt Wells your question is really tied to what TYPE of loan you are going to receive. So, a portfolio/commercial/DSCR loan - those don't even have DTI. They measure the loan on different things. They also don't have seasoning either. Well, let me back up some - they COULD have seasoning...but we don't work with those types of DSCR/Commercial lenders because there are better options for us.

When receiving a Fannie/Freddie type of conventional loan - those have DTI. Those also have seasoning in this scenario (other scenarios they don't). If I want their less expensive money, then I need a strategy to work within their rules. With Fannie/Freddie they ALWAYS look at "Debt-to-Income" because that is part of their written guideline requirements. We don't have a choice if we use their money. With other loans, we have options but we will pay for it with a higher rate or a prepayment penalty, etc.

Hope that makes a little more sense.

[Ikenna Okoye]

@andrew Does this work around strategy work with HML into conventional or DSCR as well? Would you essentially have the LLC hold a note/lien for the difference between the HML payoff and 75% LTV?

Scenario:

ARV = 200k

Purchase + Rehab (HML) = 120k

LTV = 75%

LLC lien = 30k cash out with reminder of LTV limit

[Jason Ham]

Hi @Andrew Postell,

This is truly fantastic information and it's amazing to see how you posted this 7 years ago and still keep up with it!

Have you tried using this method with a DSCR loan? I know some lenders can do 100% cash back on a DSCR loan up to 80% of the new appraisal amount whichever is lower. I'm just wondering if the rehab would have to be done before so that the value could be determined.

I see you mention that Fannie/Freddie guidelines will allow you to do 75% of the ARV so that you can get this done on day one. Is an appraisal done even before the rehab is complete in order to get this finalized? I've seen appraisals that can be completed to give an ARV and then a 1004D is required afterwards.

[Albert Bui]

Yes you will need the rehab to get done first before you can determine the value. This is the way it is on a regular purchase or refinance loan (cash out or rate term refinance). The only types of loans that will utilize a projected future value are rehab 203k/homestyle/renovation/private/hard money bridge loans, those will order an as is today and future valuation ( ARV - after repair value) to determine your maximum loan amount with rehab included. These loans that include future rehab will come in different flavors from current 7's to 12%'s in rates with different speeds to close, ease of access to the funds, different pricing and requirements to qualify.

Typically the more Full Doc or tougher the qualifications are (like debt to income or DTI req's) the lower your rate/pricing so its a trade off. The more full Doc a loan is typically there is more documents, scrutiny, and ultimately a longer closing time frame where as a private bridge note can fund in 1-2 weeks the full doc rehab loan may take 40-70 days on average depending on a host of variables (your General contractor's documents, the appraisal, scope of work, etc).

Its imporant to figure out what you're trying to do, what deal you have in front of you, your capability in terms of all loan products from DTI focused ones, the bridge private ones, your time frame to close (the type of seller you have before you), and execute with the best game plan.

Best,

@Matthew Kwan

@Carlos Valencia

[Andrew Postell]

@Jason Ham thanks so much man.  I really appreciate it.  Kind of crazy that we have been using this for so long but it still comes in handy for sure!

Now, usually we don't need this technique with a DSCR loan. The main reason - they don't have seasoning! I mean, some do...but we don't work with those lenders. Well, some will have a 90 day requirement...that seems ok to me since I'm need a couple of months to rehab...but if it's longer than that, we don't use those types of lenders. You can work with whomever you want to work with of course.

Now, when I wrote this way back...75% was the max for Fannie/Freddie. But we have certainly done 80% and even 85% LTV using this strategy. Both of those levels are now allowed using this technique. I can certainly order an appraisal BEFORE the rehab is completed. And then, as you mentioned, order a follow up "final" inspection - that we use a 1004D to complete it on.

Hope all of that makes sense but feel free to reach out with any questions.  Thanks for reading!

[Andrew Postell]

@Ikenna Okoye thanks for posting here.  Sorry that I didn't catch this initially....looks like the tagging tool didn't work so well when you posted...but here's your answer.

We can ASBOLUTELY put a "2nd lien" from our own LLC in place here. Now, Fannie/Freddie have even more specific rules when you do this but this is something that we do on occasion. We only do it occasionally because usually the Hard Money Lenders we work with will provide me 75% of the ARV anyway. This certainly goes back to "you can use whomever you want"...but if they aren't lending you 75% of the ARV, then that usually means you have to bring more money out of pocket. For example, if the lender states "we lend 90% of the purchase price and 100% of the rehab not to exceed 75% of the ARV"....that's not the same as lending 75% of the ARV.

And for the DSCR question, I kind of answered that above - DSCR loans don't require seasoning. So, there's no reason to file your own lean, or a 2nd lien, or anything like that. Just do your normal cash out loan.

Anyway, I hope all of that makes sense.  Feel free to reach out with any questions and thank for your patience here.

[Jason Ham]

Quote from @Andrew Postell:

@Jason Ham thanks so much man.  I really appreciate it.  Kind of crazy that we have been using this for so long but it still comes in handy for sure!

Now, usually we don't need this technique with a DSCR loan. The main reason - they don't have seasoning! I mean, some do...but we don't work with those lenders. Well, some will have a 90 day requirement...that seems ok to me since I'm need a couple of months to rehab...but if it's longer than that, we don't use those types of lenders. You can work with whomever you want to work with of course.

Now, when I wrote this way back...75% was the max for Fannie/Freddie. But we have certainly done 80% and even 85% LTV using this strategy. Both of those levels are now allowed using this technique. I can certainly order an appraisal BEFORE the rehab is completed. And then, as you mentioned, order a follow up "final" inspection - that we use a 1004D to complete it on.

Hope all of that makes sense but feel free to reach out with any questions.  Thanks for reading!

 Thank you for the reply and what you say makes perfect sense. I'm working on structuring out purchases as you have suggested. If you don't mind me asking, which lenders are you working with that have 0 to 3 months of seasoning?

[Andrew Postell]

@Jason Ham certainly willing to share but just reach out directly if you don't mind.