Rental Property Investor · West Lafayette, IN · Member since 2016 · 9 posts · 0 votes
We recently bought (at auction) and fixed up an ~$85K (post-reno) townhouse (2 large BR, 2 full + 2 half bath) in a nicer Dayton, Ohio, suburb. We have tenants in place on a one-year lease currently ($950/month), which is currently in the third month. We're pretty pleased with this, and would be even more excited if we could cash out!
This was a cash purchase, so we're not looking to do a "re"-finance, but rather acquire an initial loan on the property for some fraction of the value (to proceed with BRRR, of course). Is that even possible before a one-year seasoning period--I know it may not be if there is an existing loan, but does this differ since it was a cash purchase and there's no existing note? (Also, since this is one of our first deals, we probably don't really need the income from the rental to qualify for a mortgage.)
Anyone have recommendations on how best to proceed on this in the Dayton or Cincinnati area (or nationally)--what would other folks here on BP who have had success recommend?
Here is something I ran across in another discussion that I copied and will paste it. Here it is:
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 ofownership since the LOWER amount is your purchase price. After 6 months you could receive the full 75% of the ARV.
These are easy to finance. No seasoning needed, although the loan amount may be limited by your total costs. Seasoning is only an impact when you want to use full appraiser value.
Here is something I ran across in another discussion that I copied and will paste it. Here it is:
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 ofownership since the LOWER amount is your purchase price. After 6 months you could receive the full 75% of the ARV.
Thanks for the input folks. In my case we paid $59K and put about $11K into the property (a bit more than anticipated but that is how such things always go, right?). So we have $70K in and ARV is going to be in the neighborhood of $85K, or maybe a bit higher. Seems like "actual expenses" would get us more than 75% of the ARV anyway in this case?
@Bryan C. Most lenders have "seasoning" requirements. The most common is 12 months. The assumption is the property value has not changed from the purchase price + the cost of repairs. (don't throw stones, I don't make the rules)
While we all know we create value by improving the property, banks are more conservative. Most loans are oriented toward consumers, not investors, so we get restricted.
That said, I have persuaded banks to use the ARV at 6 or 7 months. But that is the exception, not the rule.
@Bryan C. This is delayed financing. Doing this allows you to pull your cash right out with no seasoning period.
If you make repairs, put tenants in place, then wait the typical 6 to 12 months seasoning you can do a cash out refinance. Depending on the bank you will get 70% to 80% LTV. So as you can see it is not limited to the amount of cash and closing cost if you go the other route.
I believe you can do a cash out refi (that's what it is even without an existing loan) with 12 months seasoning or usually you can get an exception from most banks at the 6 month mark with 2 appraisals supporting the value. Then you can probably get about 70-80% of the appraised value. I would check with Union Savings Bank on Far Hills and talk to Tamara Epstein and tell her ozzy referred you lol
Thank you for the excellent information and recommendations all (and I will certainly check with Union, @OzzyS!). Does anyone else have recommendations for Dayton/Cincinnati area banks that are particularly amenable to this sort of loan or you've found to have favorable rates? I'll be checking with my credit union, of course, but as a relatively recent arrival here in Dayton I don't have an existing relationship with any of the other local banks.
Good luck with Union Savings if you are an out of state investor. I spoke with someone there are they have strict guidelines to only deal with in-state residents.
Union appears to be right here in Dayton and just down the street from Meadowlark, one of my favorite local restaurants. Guess I know where we'll be going to celebrate if we use them. ;)
You wrote "This was a cash purchase, so we're not looking to do a "re"-finance, but rather acquire an initial loan on the property for some fraction of the value (to proceed with BRRR, of course). Is that even possible before a one-year seasoning period--I know it may not be if there is an existing loan, but does this differ since it was a cash purchase and there's no existing note? (Also, since this is one of our first deals, we probably don't really need the income from the rental to qualify for a mortgage.)"
Whether it's a refinance or new loan, if you're using a Fannie Mae or Freddie Mac guaranteed loan (aka conventional loan) you're going to be subject to their rules and the only way you could use conventional financing below 6 months is delayed financing. Here's a link. https://www.fanniemae.com/content/guide/selling/b2...
Here's a summary:
Your new loan amount can’t be higher than the total of what you paid for the home, including the purchase price, closing costs, prepaid fees and points.
Your original purchase had to have been what’s called an “arm’s length transaction.” That means you can’t be related to or have a personal relationship with the seller. For example, you can’t buy a house with cash from your parents, your boss or your friend and then get delayed financing on it.
You need to provide proof that you paid in cash, like your Closing Disclosure, settlement documents or recorded trustee’s deed showing that no mortgage was used to obtain the property.
You have to share documentation of the source of the funds you used to purchase the house.
If you use savings earned from your employment income or an unsecured loan like a personal loan, you’d need to share the documentation of those transactions.
If you have a loan secured by an asset other than the new property (a home equity line of credit, or HELOC, on another home), you'd need to show that the cash you took out was used to pay off or pay down the mortgage on that other property and not to pay for the purchase of the new home.
If you were given gift funds for the cash purchase of your new property, you can’t reimburse the donor with the proceeds you’ll get from delayed financing.
Keep in mind that all of these requirements may vary depending on the type of loan product you're looking for. Some loan types, like FHA and VA loans, don't allow delayed financing at all.
Be careful in the lender you choose because some lenders have overlays making the seasoning period longer. PM me if you need a lender in Cincinnati. We (US Commercial) don't do conventional loans, but I can refer you to one that does in Cincinnati with no overlays regarding seasoning.
@Stephanie Potter, thanks for that detailed reply and the summary of the even more detailed Fannie Mae rules! A six-month seasoning period wouldn't be so bad; I was just hoping to avoid 12 months. The 6 months (for non-delayed financing eligibility) starts from date of purchase, rather than when tenants are placed, it looks like? That point is coming at the end of October, so not terribly long.
Folks above have mentioned the ability to fold in renovation costs (in addition to the cash purchase price of the pre-renovated home) as part of the basis for the loan, but I noticed that you don't, and that there isn't any mention of that (that I found, anyway) on the Fannie Mae page either. Is that something that banks allow at their discretion?
I am located in Northern Ky and am interested in delayed financing or commercial lending contacts in the area as you described above. Thanks in advance for any information or advice!