CASH OUT REFI FOR INVESTMENTS ???????????

Question

Maybe someone can help me in regards to the best way of doing this. I would like to purchase rental property to hold. So my strategy was to purchase with won payment with a rehab or conventional financing. Most properties I am considering is below market value, around 55, 65 LTV.

Knowing I have to put a 20 % or more down payment to purchase is standard. After closing the property at a later date if not soon obtain a cash out refinance loan. Reason for this is to get my down payment back out of the property in order to proceed to the next project.

Could someone suggest a financing option to achieve this goal. I only found one credit union would do a cash out option but only after I hold the property for 6 months min. Obviously this will not work to quickly grow my portfolio.

Any help or suggestions would be greatly appreciate.

Andrew Postell · Answer

@Freddie Williams if you would like you can purchase an investment property with 15% down.  The rate is better at 20% but if you are refinancing in a few months maybe putting down the lower amount might be better so you can keep more cash.  Just an idea for you to think about.  But, a conventional cash out refinance means you can take 75% of the Appraised Value.  However, you will have to wait 6 months to do a conventional cash out refinance.  A conventional loan will have the best terms and the best rate.  You could find a "portfolio" loan that might allow you to take cash out sooner but you will pay a significantly higher rate.  Let me know if  you have other questions on this topic.  And if you think this is helpful then give this post a vote so others can see it.  Thanks!

Andrew Postell · Answer

@Freddie Williams & @Katherine S. the strategy to use your LLC to lend will allow a SIGNIFICANTLY better term for you to recoup your money.  Let's assume that you borrow money from a hard money lender to buy a property and complete the rehab.  Once the rehab is complete you then refinance into a traditional mortgage.  With this we get to refinance at 75% of the ARV to the property.  Since you didn't buy with cash...there's no delayed financing rules.  We are just refinancing.  So what if we just replaced the Hard Money Lender with your LLC?  So instead of buying with cash, your LLC puts a mortgage on the property for you and we then refinance you out of that mortgage.  You can then get back 75% of the ARV and not have to be subject to the "Delayed Financing" rules.  Does that make sense?  I'm sure this spawned more questions.  So please keep tagging me so I will get notified to keep answering. Thanks!

Albert Bui · Answer

HI Freddie,

Most people will only provide you the options they can provide (conventional  lending, bank products, etc) but here are some ways to achieve what you're looking for:

- private/hard money to purchase the property + escrow holdback for rehab funds into one single loan. This allows you to get all your funds back especially if the PML/HML does a collateral assignment for your down payment and releases this "collateral," back to you when you refinance / "take out," the PML/HML loan. This gets back your down payment and the rehab funds completely under 6 months assuming your GC/rehab crew can get it done that quickly of course. If the property appraises high enough, basically under 70-75% of ARV or after repair value. To get out more than you put in you'll need the below options or a combination thereof.

- you can wait 6 months to cash out based on conventional guidelines like the above response mentioned and any conventional lender like myself or others can do this but this obviously takes time and carrying costs so it has its pros and cons

- you can find a portfolio lender who uses rental income right away and has little to no seasoning period (they are out there I know of a few I personally use in WA state and CA)

Hopefully that helped let me know if you have any additional questions.

Constance Grandelli · Answer

I bought (cash) a little one bedroom, one bath house that has been rented for over two years.  I tried to get a cash out refi on it, but the banks said they would not loan on a 1/1.  Lesson learned, don't buy little houses?  Or - try other banks?

Aaron Smith · Answer

Andrew, you can still buy in cash and do a cash out refi the day after closing and still get 75% LTV of the appraised price (but I know the total loan amount cannot me more than the original purchase price).  I just did this with my 10th loan.

Andrew Postell · Answer

@Albert Bui always follow what you feel is comfortable.  This process does not follow the shell definition and the note is not fake.  Either of those actions would not be ok.  Your company is filed with the standard places and it is fully disclosed that you are the owner.  The company is active.  The note is also drafted and filed in plain sight and with the standard government agencies.   Think of it like if you owned a bank.  Or if you were a majority shareholder of a bank and that entity lent you a mortgage that you then refinanced.  That transaction would be considered a non-arms length transaction.  If you have any personal issues with any action then just don't do it.  No worries.

Albert Bui · Answer

The issue was not about arms or non arms length but rather it was with the creation of a note by your LLC to yourself personally as the borrower for the sole purposes of using a conventional loan to payoff that note. This is to avoid 6 months title seasoning and having to wait or in hopes of getting a higher cash out because by paying off this note you're in effect doing a rate/term refinance on one end (as the borrower) but its a cash out back to your LLC which you own (as the borrower still).

The question isn't about the rate term refinance its about the ethics & legality of that note you mentioned from the LLC.

The thought has crossed my mind however If I were to do that strategy mentioned in the above threa I would make sure my LLC has the cash or line of credit to actually "lend," to myself prior to carrying back a note in the LLC.

Andrew Postell · Answer

@Albert Bui yes, this is a practice that people use but it does take some education for persons to understand the process.  Fannie/Freddie do actually address this in their lending terms.  "One Arms Distance" is a term that conventional loans use to describe a separation of interests in the loan.  But if you have a "Non-Arms Distance" transaction, meaning you are the realtor on the deal, or if you are related to the seller, or if you have a relationship with the lender, then you are limited to 80% of the property value with your loan.  For a primary home this would be pretty significant but for an investment property this rule has nearly no bearing.  Especially when refinancing.  Since the refinancing limit on an investment property is already 75% then it doesn't matter that you are limited to 80%.  Feel free to ask more questions if needed. Thanks!

Albert Bui · Answer

The only problem Andrew is that the LLC has to have the money in the first place and there actually has to be a transfer of funds from the LLC to herself personally otherwise what you're saying is you're creating a Shell/fake note with an entity you own only to to convince a conventional lender that they are paying off a credible first trust deed note as a rate term refinance.

In theory it sounds great, only when I asked a hard money lender to do a similar thing with their funds by funding with a larger note but only disburse enough funds to purchase the property  so that when I do a rate term/regular refinance I could get 75% of ARV (the total acquisition cost up to the limits of the note) they told me it was mortgage fraud so because there was no real funds allocated for the full note amount and that they were not comfortable taking the risk. This might be a fluke or a new area they weren't familiar with or it might be well founded.

So while that sounds nice there might be more to it.  Are you saying you do this or have seen others do this?

Andrew Postell · Answer

@Freddie Williams exactly!  You'll need to record the note just like normal but this will allow  you to get around the Delayed Financing restrictions.

CASH OUT REFI FOR INVESTMENTS ???????????

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