Cash-out refi/HELOC question right after cash purchase
Member since 2019 · 6 posts · 0 votes
I am a wholesaler. I have a property (in good neighborhood) that I have under contract for 40k. The as-is on-market value is about 100k and ARV is about 160K-170k. It is currently rented with long term renters that pay 750/month (under market by 100 for property condition) plus utilities. I want to buy it for cash myself and either do a cash-out refi or get a HELOC on it. I want to do this right away after I purchase this. What are my options to use built in money to get more money out than I just paid for it. I understand that Fannie will make me wait 6 months before I can do this if I want to take money out from equity.
@Faizul Islam very sorry here. And thanks for your patience....I picked a heck of a time to travel but I am back on mainland US now. There are over 8,000 lenders in the US. I unfortunately cannot speak for them all. Some lenders have extra rules in place (we call them "overlays") and some just outright hate investment properties. This is why we preach about working with "investor friendly" lenders. Usually these are smaller, more local lenders. Because those lenders usually don't have many overlays. Fannie/Freddie absolutely, 100% allow this method. We have been using it for years. I can certainly point you in the right direction for a lender on the next one but if you want to try to find one on your own try asking these questions to determine if they are "investor friendly":
Questions for Lenders
@Faizul Islam if your numbers are right then this should be simple. Buy the property in cash, and then have a lender do a cash out refinance in six months. There isn't much to mess up on this one.
@Faizul Islam Fannie Mae will not make you wait 6 months...but more on that in a second...first, what loan type are you prequalified with? Meaning, will you be using Fannie/Freddie money or a portfolio/commercial loan? This is important to know because if you are going to use Fannie/Freddie money then a whole set of rules apply to this scenario. But if you aren't going to use that type of money....then an entirely DIFFERENT strategy will need to be used.
Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money.
Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term. The most common portfolio style loan in Texas is a 20 year adjustable rate loan. These loans are easier to get but the terms are different.
Fannie/Freddie types of loans will be available everywhere and those rules might change SLIGHTLY between lenders. Portfolio loans can run the gambit. Since each lender controls it’s own money you will have to call around to ALL the banks to learn about all the programs. A mortgage broker will help with this some…but even the best mortgage brokers don’t’ have access to ALL portfolio loans out there.
If you are using Fannie/Freddie type of money I wrote an entire post on that subject HERE
If you are using the porfolio/commercial loan...then you will need to ask your lender what their rules to this are.
I know this is lengthy but I certainly hope it helps in some way.
@Andrew Postell. Thank you for the detailed post. Your link has been very eye opening! I am still a little confused though. Please guide me through my scenario here and steer me where I am wrong.
Yo say this:
Which note? The bank note that comes after or the original note that was created between my 2 LLCs.
@Faizul Islam do you know if you can qualify for a Fannie/Freddie type of loan?
@Andrew Postell I see no reason why I wouldn't. I have a w2 job that pays over 6 figures, DTI is under 25 percent, credit score is about 740 and I only have a personal residence with a mortgage.
@Faizul Islam ok, right on. Then you have a pretty close outline but I'll give some clarifications here:
1. Fannie/Freddie won't allow you to close in the LLC. The borrower must be an individual and that means the title of the property needs to be an individual too. You can certainly change the title to the LLC after you close...but the person will be responsible for the loan for the life of the loan.
2. So if you are the borrower on the Fannie/Freddie loan step, then you need to be the borrower on the LLC loan step. So the LLC will lend to you personally, and that's the loan that will be refinanced. That's the loan that is filed (and a title company can file it for you if you want).
3. This post was written initially 2 years ago so some rules have gotten a better since then. You can refinance up to 85% of the ARV if it is a single family home. But a 2-4 unit is still 75%.
4. When you go to your lender they will be doing just a regular "rate and term" refinance. Or a "no cash out" loan. This whole strategy is to AVOID cash out loans. You get better rates and you can go up higher on the LTV too.
Hope this helps but feel free to ask anything additional. Thanks!
I ran into a snafu using "HOW TO PROPERLY STRUCTURE BUYING A HOME WITH CASH" method in your article. Once I filled out the Verification Of Mortgage, the underwriters saw that the LLC was mine. They stated that I personally financed this purchase and would need to wait 6 months for a cash-out refi. Since there is a lien on it they cannot even do a delayed financing for the original loan amount. Do you have any recommendations on what I should do now or how I can avoid the same situation going forward?
@Faizul Islam very sorry here. And thanks for your patience....I picked a heck of a time to travel but I am back on mainland US now. There are over 8,000 lenders in the US. I unfortunately cannot speak for them all. Some lenders have extra rules in place (we call them "overlays") and some just outright hate investment properties. This is why we preach about working with "investor friendly" lenders. Usually these are smaller, more local lenders. Because those lenders usually don't have many overlays. Fannie/Freddie absolutely, 100% allow this method. We have been using it for years. I can certainly point you in the right direction for a lender on the next one but if you want to try to find one on your own try asking these questions to determine if they are "investor friendly":
Questions for Lenders
@Andrew Postell
If I use a personal loan to buy the property, would I still be able to refinance? If they include the personal loan payments (high interest, short term) my DTI ratio goes to hell. But, the cash-out would be to pay the personal loan and the cash flow from the rent should decrease my DTI.
I’m having a hard time finding a lender to answer these questions, in the Pittsburgh area (if anyone knows of a good lender I’m all ears).
I’ve done this quite a few times. As long as the lender knows that you are using the funds to free up your other credit lines it shouldn’t be an issue. The lender might not hand you a check for the full refi amount. They may make payment directly to your short term credit lines so they are comfortable that those are reconciled. I use Somerset Trust. Send me a colleague request and I will send you the contact info to the loan officer I use
@Jimmy Suszynski the personal loan payments should not be held against you....because it will be paid back with a cash out loan. I would certainly say you need some better advice on how to structure the deal but it's absolutely possible to structure it correctly and close it. I know one lender in Pennsylvania if you want to message me on it I will share or you could just post in the Pennsylvania state forum. Should be some good locals there that can guide you on who they use. Thanks!
@Faizul Islam there are portfolio products available. As long as the property is leased and appraisalable.
Let me know if there are any questions.
Regards
Joe Scorese