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). • This rule does not apply if you purchased the home with CASH (more on that in section 2). • 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. • 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. • 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. • 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 HELOCBUT you will be limited to the amount of….Your purchase price + closing costs (costs when you purchased the home)OR75% of the “After Repair Value”… • 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)OR75% of the “After Repair Value”… • Your purchase price + closing costs (costs when you purchased the home) • OR • 75% of the “After Repair Value”… • 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)OR75% of the “After Repair Value”… • Your purchase price + closing costs (costs when you purchased the home) • OR • 75% of the “After Repair Value”… • 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!

@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.

@Stephen Gregory sorry for the delay in responding here. Try using the @ to tag people and we will certainly get notification that you were speaking to us. @Jeff Kieszkowski for example (I wanted to tag you so you could read this as well). A non-arms length transaction is describing who you are purchasing the home from. This post does not address that topic. You will still be buying a property from "X" party (but not you) your LLC replaces the "cash" in your transaction. So think of using a hard money lender (HML) for example to buy a property. Well, rather than using HML, you are using your company. People buy with cash so that they do not have to pay so many fees to HMLs. Not everybody has cash but when you do you certainly don't want to be giving the cash away. But if you buy with cash, then you have all these OTHER rules that you face (described in Section 2). So the plan here is that you replace your "cash" with your "LLC" mortgage. And let me be very clear here, your LLC is not buying anything. It is just lending you the money. You are your own lender! So now we don't have to do any cash out rules, we are just refinancing a mortgage (described in Section 3). If you have more questions on this feel free to PM me. Thanks!

@Brian Bistolfo you can just google "note examples" in google and tons of examples will come up. that's all the title company will need to file the lien. And the "sourcing" of the funds is not necessary for this strategy. Nobody will care where the funds came from as long as you show the lien on title. Hope this helps but feel free to PM with more questions if needed. Thanks!

@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!

@Andrew Postell thank you for posting this. Great info and well put together. All the best to you. Jorge

@Ron Hall yes, absolutely you need to keep in mind any "closing fees" that apply to your state. Many states only have a "transfer" tax; meaning, you pay a % tax when you transfer ownership. So weather you have a mortgage or not, you are paying that fee. But some states, like Florida and Kansas, have a mortgage tax. So the item that should be considered, when buying with cash, it is better for me to wait 6 months, take 5% less in money, miss other potential real estate deals, to avoid a $.35/100 tax (or whatever your state mortgage tax is)? Or maybe just use a "portfolio" loan instead of waiting the 6 months...and therefore receiving a higher rate, or a 15 year loan, or an adjustable loan...or all three...to avoid that tax. Just know the math and you will see the right answer. Thanks for posting!

@Andrew Postell this may be the best post in the history of BP... thank you

@Paige Yu yeah, no problem. Ask away! Here's the answers: • Can lien be filed at any time? - Yes, Fannie/Freddie have no restrictions on when the lien needs to be filed. You can certainly file it after closing. • Is there a "best" time to file the lien? - Yes, the best time to file is "at closing". The title company is already drafting documents for the closing...and they are already filing documents with the county. AND you are already signing things at closing too. So it's just easier to do it at closing. • What if the appraisal came in higher? (and I'll even add lower too) - And this is common. We might estimate the value to be $100,000...but what if it comes in at $99,000? Or $101,000? One of the things you don't see as a consumer is that lenders talk to each other during a loan. Since we don't know if you have taken a draw (which makes the balance higher) or paid down the loan....lenders will call each other and ask "Hey, what's the official PAYOFF to this loan"? The payoff adds in all the interest, fees, etc. that might be there so that the lien is paid off entirely to provide clear title to the next loan. So you will WAIT until the appraisal comes in on your property to provide the payoff. This helps the refinance process. Because what if you had to bring money to closing because your payoff was higher than the value? Well, you would be bringing your own money to pay back your own loan. It's just redundant. So to keep it simple, you will provide the payoff AFTER the appraisal comes in. Hope all of that makes sense. Feel free to ask anything additional. Thanks!

Anybody done one of these deals and gone the DIY-lending route with their LLC? I've got the LLC ready to go and a property lined up. I suppose the next step would be 1) finding some boilerplate loan documents that I can configure to create the loan and file it, and 2) opening a business bank account for the LLC to operate with (so that the money is coming "from" the LLC). Can anyone advise as to whether those are the right steps and/or point me toward a resource for item 1? Thanks!

@Andrew Postell deserves some sort of award from Bigger Pockets for this thread (e.g. a "knighting" ceremony officiated by @Brandon Turner). I'm sure you've spent dozens of hours writing this and responding to each question. Thank you for being a tried and true member of the community!

General Real Estate Investing

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How To: Cash out 1-4 unit Property

Andrew PostellPro Member

Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes

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….

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!

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How To: Cash out 1-4 unit Property

How To: Cash out 1-4 unit Property

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