How To: Cash out 1-4 unit Property

197 Replies

@Sean McCluskey no need for lender's title insurance for this type of a lien.  It's your lien, so your personal title policy should cover you for what is needed.  Oh, and keep in mind....we are doing this to AVOID delayed financing.  Delayed Financing would cause a whole series of issues (see the 2nd section of the original post) and those restrictions are the whole reason why we do this method.  We are doing this method so we can have a "rate and term" refinance (or a non-cash out refinance).  I hope this makes sense.

@Joseph Brown sure! What we focus on with this strategy is FILING A LIEN. You having your name on the property already is actually more helpful....but in case others are reading this, you can certainly have it in a LLC name and still use this strategy. Now, you will file your lien FROM your LLC.  So the lien that is filed on title is from the LLC, you are the borrower.  Does that make sense?  Just record your lien as usual and you should be good.  Oh, and I'll preface this with...you should be good with using a Fannie/Freddie loan, so make sure you are already prequalified BEFORE filing a lien.  Feel free to ask anything additional.  Thanks!

@Joseph Brown the whole point of this strategy is to AVOID cash out refinances.  As mentioned in section 1 and 2 of the original post cash out loans have a TON of restrictions.  This strategy is to avoid those restrictions.

@Andrew Postell @Alexander Felice  I have another question. Should I pay my escrow company $250 to draft an Escrow agreement to hold and disperse rehab funds? They mentioned that an alternative option is I can have another party hold the money and be listed on the closing statement as Payee.

My LLC will be the lender - can I just have my LLC be the payee of the escrow rehab cash as well?

Thanks!

Hi Andrew! 
Thank you so much for sharing this great knowledge! This is extremely helpful to me.
I have a question - is there a lower cap to the appraised value? For example, if I bought a property for $60k cash, my LLC put a lien on it, and the appraisal value comes out to be $70k or $80k -

1) is this situation still eligible for a refinance ? 
2) if yes, will the cashback amount be 75%*$70k , or 75%*$80k (if appraisal value is $80k) ? 

Thanks so much Andrew!


Best,
Paige

@Paige Yu some lenders do have a loan minimum but Fannie Mae and Freddie Mac do not. I would certainly make that one of the questions you ask lenders as you interview them. Keep in mind this is NOT a cash out loan, you are refinancing your existing lien - that is called a standard "rate and term" refinance (meaning, you are changing the "rate and term" of the existing lien). With this strategy you can refinance 75%, 80%, and even 85% of the ARV on the property. The full ARV. So if the ARV was $80k....and you wanted to keep you loan at 80%....then that would be $64,000. So filing a lien for $60k seems about right since that will give you some room to roll in closing costs. Hope all of this makes sense.

Thank you so much @Andrew Postell ! Your answer is so helpful! 

Can I ask a couple follow-up questions - 

  • Can the lien be filed at any time? I closed on my property a month ago and my LLC is not registered yet, and some rehabs are being done, will it work if I register my LLC and file the lien now?
  • Is there a best timing to file the lien? If the lien amount is to include the rehab cost too, as I learned from previous discussion in this post, would it be best if I file the lien after rehab is done or file a lien on estimated rehab cost before rehab is actually done? 
  • If the appraisal value for the property came out to be a lot higher, for example $110k for a property I paid $60k for, what would be a better loan option - "rate and term" refinance or wait for 6 months to get a Fannie Freddie loan? 

Thanks again!!

Paige

@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!

@Andrew Postell I have another question - do I need to make monthly mortgage payments to my LLC, in order for my future lender to refinance the loan?

I'm guessing the answer would be no, I just need to provide the filed-lien payoff amount when the future lender requests it?

Thanks!!

@Sean McCluskey you are correct - you do NOT have to make payments.  This is not a requirement from Fannie/Freddie to refinance an existing mortgage.  I encourage everyone to make their liens 0%, 12 month terms, no monthly payments.  Thanks!

I'm just beginning to learn all these financing options to decide how I want to purchase my first rental. This method seems to make a lot of sense and extremely effective. Why have I not heard of more investors using this method? Just curious.

Is it basically creating an LLC. Using my own funds to deposit to the LLC (Is this step necessary?)

Buy a property with cash, using the LLC to file a lien on the property so you are getting a loan from the LLC.

Refinance, the lender pays the LLC and you essentially get your funds back?

Im really interested in this method for my first rental property. Has any done this and can go into some of the steps in more detail?

Yeah, but I dispense with the step of actually depositing the funds into the LLC account unless they are actually already there. Just not necessary - escrow doesn't care. Most of the time, because I am not always sure who I'll use to refi my money back out, I buy in my own name and quit claim it to my LLC if my refi lender wants that. When I receive my final firm loan offer, I use that amount to write my LLC a deed of trust that I file prior to close. No need to bother with writing a mortgage agreement. No lender has ever had a problem with the fact that it's just a lien without payment/rate or term. This way the rate and term (not a cash-out cuz it's a more expensive loan) payoff is guaranteed to get me all I want from the deal (to the limit of the LTV). Either way, afterward, I QC it to the LLC after refi. Easy-peasy because I learned it from @Andrew Postell

I would setup a nonprofit with non family board members

donate the asset to the board for a tax deduction

NP pays no property taxes, income taxes going forward

donor/investor retires and become Executive Director

and draws a salary for as long as the asset produces

at the same time helping the public with affordable housing

getting support from planning, politicians, taxes, grants, etc.

Is this method a commonly used method by investors? It makes too much sense imo for it not to be used, yet I haven't really heard this method being used from any of the investors I've talked with. 

@Richard Phan one of the benefits to being on Bigger Pockets is that you get to see strategies like this.  As far as I know, I am the only person in the country that teaches this method.

@Andrew Postell

This is an absolutely incredible thread! THANK YOU for your patience and time spent here answering questions. I see that you are a lender in TX -- totally wish you were in my state!

If you don't mind, I have a few more questions to add. I'm definitely a newbie, so please bear with me :)

My questions have to do with the actual steps you list in section 3:

  • 1. You create an LLC - all set

  • 2. You buy a home - Just for the purpose of what I need to do when, this step is basically finding a house and getting an offer accepted? And then I pay with a cashiers check or wire on the closing day?  Please don't laugh -- I've never bought a house cash, so I'm being dead serious :) 
  • 3. Your LLC gives you a loan for the home -- What are the steps for this? I read that we technically don't have to transfer any money from me to LLC or vice versa. But, is this the "writing a loan note" step? If so, sounds like I can google a loan note template and use that? And write it for 0% interest, ballooning at 12 months, but then sign both as borrower and lender?! That seems like a red flag? Are there any other steps other than this? When does filing the lien happen? Or is filing the deed and lien the same thing?
  • 4. You file the deed for that loan at the county courthouse -- I think I read that this can also be done by the title company at closing? 
  • 5. You use the money from the LLC to buy and fix up the property 

  • 6. Once the property is completed, your conventional lender comes to refinance the loan -- Get a preapproval first! Is this something I give them my projected numbers for? Like ARV and rental income?
  • 7. Your conventional lender runs title and sees there is a loan 
  • 8. 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. -- Cash the check to my LLC and then transfer the money back to my own account. Okay, so this is where I get confused about tax issues. Won't my CPA see this as income? Although, I'm technically not making any money since I'm not paying/collecting any interest?

One last question. Does my LLC have to be related to real estate or can it be from a totally unrelated business I own?

Thank you again so much!

@Nikki Closser certainly willing to answer any questions and I'll answer these one at a time here in case anyone else is researching this subject:

  • Buying the Property - you take your funds to the title company.  Wiring the money in or cashier's check are the normal methods.
  • Filing the Lien - some states differ in the paperwork for this step.  In Texas, we use a "Deed of Trust".  Many other states use that same form.  A local title company can certainly help us file whatever is needed by the state you are buying in and most will even draft the document for you for a small fee.  Many people have just googled the document as well.  There are many you can find free of charge.
  • PreApproval - I would ABSOLUTELY recommend for everyone to get preapproved.  This will tell you if your refinance step can accommodate this strategy.
  • Refinancing - when you refinance a loan you are not earning any income.  Meaning, you put $100,000 in the property, the lien is $100,000....so no income generated.  Your company might earn income on a loan if it charged an interest rate.  But that's why we encourage 0%. No income means no taxes.  Also, when you do refinance you can go up to 85% now.  When I first wrote this post the rules were a little different.
  • Business Loan - Any business can lend money.  This is a normal procedure and the business type does not officially matter for this strategy.  A layer or accountant might encourage you to have a separate business if you start doing this on a regular basis but for the refinance step it does not matter.

Hope this helps!

Thanks for the article, Andrew -- very clear on how to do this with a cash-purchased investment. Question for you (more of a memory-refresher, perhaps): If we purchase a property with hard money, enough to cover the purchase and part/all of the rehab, and take a loan from the LLC, as you covered here, to cover whatever out-of-pocket costs we might still incur, would we be able to refinance both the hard money loan and the secondary loan from the LLC?

Thanks in advance for your answer to this (or a link to where you/someone answered it elsewhere)!

~ Shawn

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