Buy and Hold. Self finance cash to Cash out mortgage

16 Replies

Background:  have 2 rentals purchased in the 90's, looking to start investing again. I am interested in buy / hold (or buy and flip if right property) properties. 

Financing strategy question.

I have the assets to buy properties Cash, and thinking this is an advantage in buying properties at a good price.  Intention would be to buy, rehab and then rent.

Strategy discussion: 

  Upon completing the rehab, I would then take a Cash-Out mortgage to return liquidity to my portfolio, and then likely purchase next house with that cash.

Help me understand if I am missing something in this model?  do others do similar?

Example: 

 Buy property for $200k.  Rehab $50k. Cash.  AFV $300k.  Assuming  25% down.  Refinance would pull $225k of $250k invested.  costs: 2 title costs +  1 finance closing costs (vs 2 title, and 2 finance closing)

The alternative is to buy with financing, and then cash out financing later (or leave $50k down + $50k rehab investment in property)

Dean,

That sounds like a great plan. By using your cash on the front end to handle any rehab you have it allows you to get the ARV higher for when you want to get some permanent financing, which in our market with the rates you can lock in at for 15-30 years, is a good deal.

I am personally doing this same strategy except that I use a private lender for the initial buy and rehab and refinance him out of the property.

Like the strategy.

Been doing that for 13 years. Mostly cheap properties, but exactly the same.

In 2003, I had 3 cheap rentals free and clear. I got three HELOCs, one on each house, bought 4-5 more, Then got three more Helocs. Then took my portfolio to a bank and got a Line of Credit to pay off the 6 HELOCs and buy a few more......Then some loans to buy apartments and other houses, and duplexes........ Now - 90+ units.

@Dean Engel  Good strategy. Cash give you an advantage on the purchase.

If you want to get a new appraisal after rehab, then you will have to wait for 6 months. You can do a Delayed financing purchase loan with in 60 days. The loan will be based on the purchase price.

If you want to continue doing this through conventional financing (you can go up to 10 per individual), then the strategy will run into a problem when you hit #5. You will no longer be allowed to do a Cash-out Refi.

Upen Patel

Mortgage Banker, VA Loan Specialist

National Lender, Federal NMLS# 1374243

@Upen Patel Is the "6 month" window based on difference between purchase and first option for new appraisal, or is this based on some mortgage rule?

I have heard of the issues of #5 mortgage, so have considered moving into an LLC and moving to commercial loans after 4. already reviewing the Commercial loan model.

Originally posted by @Upen Patel :
@Dean Engel Good strategy. Cash give you an advantage on the purchase.

If you want to get a new appraisal after rehab, then you will have to wait for 6 months. You can do a Delayed financing purchase loan with in 60 days. The loan will be based on the purchase price.

If you want to continue doing this through conventional financing (you can go up to 10 per individual), then the strategy will run into a problem when you hit #5. You will no longer be allowed to do a Cash-out Refi.

Upen Patel

Mortgage Banker, VA Loan Specialist

National Lender, Federal NMLS# 1374243

Many of my clients are working with sellers who have the rehab cost built into the purchase price when planning on using the 'Delayed Financing Option" offered thru FNMA. With that one can finance up to 100% of the acquisition cost with some LTV limitations depending on whether it is properties 1-4 or 5-10. With respect to financed properties 5-10 this is a good way to continue cash out with potentially a higher leverage capability over strait purchase. As @Upen Patel stated you cannot do cash out past 4 financed properties any other way but delayed financing with Conventional loans.

I have an entirely different take on this and it's not because I am a Private Money Lender.  I do not ever believe that in the grand scheme of things the advantages of using all my money (meaning no financing..not all assets) gives me so much additional advantage in the market, that the risk ratio makes it worth it.  Additionally, with the current trend towards more and more restrictive conventional lending guidelines in the post Dodd-Frank environment, I never want to rely on a conventional loan program for my cash exit strategy, to allow me to turn my money again by acquiring additional investment properties.  I like transaction speed, asset based qualifying, unlimited financing capacity and product/program dependability and most importantly, leverage (20-30% of my money in the deal vs. 100% of my money in the deal.  I am more than willing to pay the higher interest rate and 1-1.5 additional origination points for Private Money, in return for all the advantages outlined AND interest only payments while I have the money in play.  I can do a minimum of 3-4 times more deals a year using Private Money Lending with few if any headaches.  Conventional lending is very restrictive now. After October 3, 2015, it will be even more so.  Just my $0.02 worth.

@Charlie Fitzgerald I like your thought process. That's definitely a different way of looking at it. The only thing that I differ on a bit is that if I'm using private money that my risk is less. When I borrow money in my own mind I consider it even more valuable than my own money. I will absolutely make sure that they are paid back plus their interest. 

Maybe I have misinterpreted what you wrote but I feel very strongly about it. My investors come first. 

I mean that your risk is spread, not less.  You can have 3-4 deals going at one time with a private money lender in them with you.  So if you have a hiccup on 1...or even 2...you're still moving...for me, it's about velocity of money...as a Private Money Lender, we make money with money...you can too...Shoot me an email and I'll send you some info.

I just posted to articles ... this sort of sounds like the BRRR method that is described in the most recent article that I posted. I guess the term REI's (Real Estate Investors) use to described the waiting period before you can cash out for the ARV is "seasoning".

Originally posted by @Matt Said:

I just posted to articles ... this sort of sounds like the BRRR method that is described in the most recent article that I posted. I guess the term REI's (Real Estate Investors) use to described the waiting period before you can cash out for the ARV is "seasoning".

 Sorry, rookie mistake...  I didn't mean to post this here.

TRID....new disclosures will replace the Good Faith Estimate and TIL at the beginning of the transaction, and another new disclosure will replace the HUD-1 Settlement Statement. New timelines will go into effect for borrowers to indicate their "intent to proceed" with the transaction. Fee tolerances are tighter, and in general, the entire lending process will be a bit more complex. Borrowers will be confused and lenders that have not proactively prepared for the changes and transitioned their internal operations flows to accommodate the changes, will find themselves in deep doo-doo. That's it in a nutshell.

Is the 6 month seasoning for a new appraisal and cash-out based on the assumption that there was an appraisal at purchase? If one paid cash and no appraisal was done, I would think a bank could do an appraisal and grant financing at any time after the purchase.

Someone more lender savvy than myself please chime in!

Originally posted by @Mark Beekman :

Is the 6 month seasoning for a new appraisal and cash-out based on the assumption that there was an appraisal at purchase? If one paid cash and no appraisal was done, I would think a bank could do an appraisal and grant financing at any time after the purchase.

Someone more lender savvy than myself please chime in!

 Mark,

  I think you are right, at least with the discussion I had with my residential mortgage agent.  

It would be interesting to see why this rule is in place.

Originally posted by @Mark Beekman :

Is the 6 month seasoning for a new appraisal and cash-out based on the assumption that there was an appraisal at purchase? If one paid cash and no appraisal was done, I would think a bank could do an appraisal and grant financing at any time after the purchase.

Someone more lender savvy than myself please chime in!

I do know that it doesn't have anything to do with an appraisal on the front end. I just did one one these and I used a private money guy on the front end who didn't have an appraisal. I did have wait the full 6 months to do the cash out refinance on the secondary market. What I've been told is that it is place to slow down those who are flipping but honestly in dont really know. 

This was a very interesting discussion and a few conversations with mortgage broker, commercial RE broker I think I have found a few key items...

1. Residential Mortgage brokers can write on 4 mortgaged units before they run out of the ability to sell the mortgage back to Fanny/Freddie.

2. You cannot write a residential mortgage to an LLC or other version of business (must be written to a person)

3. To get mortgage 5-N on residential you can talk to the Bankers "Business Loans".  There is no cash out option.

4. Private money lenders do not have the same restraints.

5. Commercial RE will not loan to SFH or any unit with less than 5 units on same property (or mixed use). (right now they are happy to loan up to 80%)

In summary: My model is functional up to 4 SFH purchased(under mortgage). 5 to N purchases this model will not work. there is no functional model to leverage Commercial RE loans unless there are over 4 units in a single property.