Cash Out Refinance Nightmare, Help Me Make Sense of It

Podcast Guest on Show #222

10 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

5y

just dont borrow so much.. also next time as mentioned above dont buy rentals in a flood zone.

as well as depending on the lender they maybe somewhat reluctant at negative DCR.

as well as if you did this as a package loan you should not pay nearly that amount in fees

talk to a local bank..

JLH Capital Partners51 Review

12 Reply

Joe Norman

Property Manager · Baltimore, MD · Member since 2014 · 1k+ posts · 1k+ votes

5y

As suggested above you could not borrow as much to keep your payment down and your profit up. Another thought is to leverage your equity with a HELOC - maybe you can find a lender who will do one of them without flood insurance. Good luck!

2 Reply

OP

Member since 2019 · 35 posts · 9 votes

5y

Jay, I wish it was this easy. I talked to every local bank in my city and surrounding cities. It took talking to several mortgage brokers to even find someone who could help me get refinances. I was shopping for banks for months, but no loan officers would do the loans and I couldn't find a single lender that was doing portfolio loans. And all the lenders that said they could do the loans individually for each house, then said they couldn't do it because they're residential properties in an LLCs name. They said it's be a commercial loan, because it's an LLC, but they said they don't do commercial loans on residential properties. And they said they don't do residential loans to businesses.

Originally posted by @Jay Hinrichs:
just dont borrow so much.. also next time as mentioned above dont buy rentals in a flood zone.

as well as depending on the lender they maybe somewhat reluctant at negative DCR.

as well as if you did this as a package loan you should not pay nearly that amount in fees

talk to a local bank..

Daniel Reeder

Rental Property Investor · Birmingham, AL · Member since 2019 · 39 posts · 20 votes

5y

@Paul O'Connor Flood insurance is not a good product and sucks the cash flow out of what should be a profitable property as you are experiencing. A lender will always require 100% of the loan insured with flood insurance even if the flood certificate says the risk is minimal.

Best not to use a lender for flood zoned properties in my experience.

OP

Member since 2019 · 35 posts · 9 votes

5y

Originally posted by @Matthew Crivelli:

The market is crazy right now. I would sell anything in a flood zone unless you like helping your insurance agent cashflow lol. Why not take the money and start new brrrs that you can plan a little better! I'm sure your homes would sell in a flash.

Yeah Matt... Hindsight. I bought them because it was a depressed market and I was buying them CASH and they would cashflow well. And none of them are very close to the water, so I didn't think it'd be much of an issue. Never even crossed my mind to check to see if they were in a flood zone, because I never thought I'd get a loan against the houses. Way before I discovered BiggerPockets, Brandon Turner, or the BRRRR Method. Maybe the play is to just sell them in this market, house prices now are bazerker. My only concern there is... finding a deal(s) to reinvest that 1031 money before my 6 months is up. I want to sell in this market, I do not want to buy in this market.

2 Reply

OP

Member since 2019 · 35 posts · 9 votes

5y

Originally posted by @Joe Norman:

As suggested above you could not borrow as much to keep your payment down and your profit up. Another thought is to leverage your equity with a HELOC - maybe you can find a lender who will do one of them without flood insurance. Good luck!

I reached out to every lender in the area and was told the same thing. None of them will do HELOCs on investment properties. I was told them wouldn't do commercial loans on residential properties and they wouldn't do residential loans on investment properties. I've had a lot of trouble even finding a lender, until I reached out to mortgage brokers.

Podcast Guest on Show #222

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

5y

Originally posted by @Paul O'Connor:

Jay, I wish it was this easy. I talked to every local bank in my city and surrounding cities. It took talking to several mortgage brokers to even find someone who could help me get refinances. I was shopping for banks for months, but no loan officers would do the loans and I couldn't find a single lender that was doing portfolio loans. And all the lenders that said they could do the loans individually for each house, then said they couldn't do it because they're residential properties in an LLCs name. They said it's be a commercial loan, because it's an LLC, but they said they don't do commercial loans on residential properties. And they said they don't do residential loans to businesses.

Originally posted by @Jay Hinrichs:
just dont borrow so much.. also next time as mentioned above dont buy rentals in a flood zone.

as well as depending on the lender they maybe somewhat reluctant at negative DCR.

as well as if you did this as a package loan you should not pay nearly that amount in fees

talk to a local bank..

simple transfer out of the LLC to your personal name.. its not like the LLC is some magic shield against liability for a single member or closely held LLC they are easily pierced if that's what your worried about.

JLH Capital Partners51 Review

8 Reply

OP

Member since 2019 · 35 posts · 9 votes

5y

Originally posted by @Jay Hinrichs:

Originally posted by @Paul O'Connor:

Jay, I wish it was this easy. I talked to every local bank in my city and surrounding cities. It took talking to several mortgage brokers to even find someone who could help me get refinances. I was shopping for banks for months, but no loan officers would do the loans and I couldn't find a single lender that was doing portfolio loans. And all the lenders that said they could do the loans individually for each house, then said they couldn't do it because they're residential properties in an LLCs name. They said it's be a commercial loan, because it's an LLC, but they said they don't do commercial loans on residential properties. And they said they don't do residential loans to businesses.

Originally posted by @Jay Hinrichs:
just dont borrow so much.. also next time as mentioned above dont buy rentals in a flood zone.

as well as depending on the lender they maybe somewhat reluctant at negative DCR.

as well as if you did this as a package loan you should not pay nearly that amount in fees

talk to a local bank..

simple transfer out of the LLC to your personal name.. its not like the LLC is some magic shield against liability for a single member or closely held LLC they are easily pierced if that's what your worried about.

That is exactly what I was worried about. But when I was doing these refinances, they told me the loans would have to be in my personal name, because the lenders said it's more difficult to recoup money from an LLC and not an individual. So I was fine with that part of it, because they told me I could transfer it back to my LLC after closing. I was worried about my own personal liability and assets being at risk. It took me talking to the right mortgage broker to even find out this info, because every loan officer that I talked to at the banks, were no help at all. I spent weeks trying to get some of them on the phone or to respond via email and I was crossing banks off my list, as they were rejecting me.

Joe S.Pro Member

Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes

5y

I know this sounds simple, but have you talked to a different insurance company as well? We had someone quote us a $7500 a year quote on a flood policy and then another insurance carrier offered one under $1000. Just an idea worth a shot.

3 Reply

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

5y

I don't love the term profit or loss in this context. This number is NOI (net operating income) after debt service. You are encumbering the properties with debt that exceeds purchase price. That negative cash flow each month is actually part of the cost to borrow $560,097.

The real question is what do you plan to do with the $560,097 cash out? I assume buy more properties, so that means you can expect additional income. Let's say for simplicity that you put the $560,097 in a dividend stock that yielded 6%. That money would make $33,605 each year or $2800 per month. If you can deploy that cash in a higher yield investment, the number just gets bigger.

Just be little careful, because your change in cash flow may have no effect on your taxes. That means you can realize a cash flow loss, but have taxable income. The interest expense from cash out refinance cannot be claimed against the property you took the cash against (if it goes over purchase value). IRS rules dictate that deductibility follows use. The interest from the cash out portion can be deductible against a new purchase, so you want to redeploy that cash. Make sure you keep the money separate and do not use anything for personal use (buying a car, vacation, personal home, etc.) You want to be able to trace every penny and track your interest accordingly. Talk to your accountant about this to avoid an audit surprise.

This is the part of BRRRR that nobody talks about; in most cases you are leveraging over your purchase price and it often results in negative cash flow. That doesn't mean it is a bad idea, but it does mean you need to redeploy that cash into other investments that produce more income.

I would only go through with the loan if I had plans to invest the cash out money.

16 Reply

William Alexander

Investor · Asheville, NC · Member since 2015 · 10 posts · 7 votes

5y

@Paul O'Connor

Shop insurance companies. I’ve found thousands of dollars in savings from shopping different agencies for flood, short term and long term rental property insurance.

David A Lisowski

Rental Property Investor · Inlet Beach, FL · Member since 2018 · 199 posts · 111 votes

5y

@Paul O'Connor

Get other flood insurance quotes.

Borrow less until the payments are reduced enough to get back to positive cash-flow or buy a lower interest rate or combination of both.

Raise the rents.

A different lender won't get you out of flood insurance. The flood certificate determines that.

Brian Brown

Flipper/Rehabber · Okeechobee, FL · Member since 2020 · 41 posts · 8 votes

5y

@Jay Hinrichs - Hi Jay if an LLC is easily pierced why create one for a single member or husband wife investing business. How do you legally protect yourself or partners.

OP

Member since 2019 · 35 posts · 9 votes

5y

Originally posted by @Joe S.:

I know this sounds simple, but have you talked to a different insurance company as well? We had someone quote us a $7500 a year quote on a flood policy and then another insurance carrier offered one under $1000. Just an idea worth a shot.

Which insurance company offered you the one under $1,000? I'd like to reach out to them.

Podcast Guest on Show #222

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

5y

Originally posted by @Brian Brown:

@Jay Hinrichs - Hi Jay if an LLC is easily pierced why create one for a single member or husband wife investing business. How do you legally protect yourself or partners.

to protect credit ( personal credit) IE utlities etc.. for lawsuits not going to help much

JLH Capital Partners51 Review

OP

Member since 2019 · 35 posts · 9 votes

5y

Originally posted by @William Alexander:

@Paul O'Connor

Shop insurance companies. I’ve found thousands of dollars in savings from shopping different agencies for flood, short term and long term rental property insurance.

Any recommendations on companies? My google searches and quotes from those companies have been astronomical.

OP

Member since 2019 · 35 posts · 9 votes

5y

Originally posted by @Joe Splitrock:

I don't love the term profit or loss in this context. This number is NOI (net operating income) after debt service. You are encumbering the properties with debt that exceeds purchase price. That negative cash flow each month is actually part of the cost to borrow $560,097.

The real question is what do you plan to do with the $560,097 cash out? I assume buy more properties, so that means you can expect additional income. Let's say for simplicity that you put the $560,097 in a dividend stock that yielded 6%. That money would make $33,605 each year or $2800 per month. If you can deploy that cash in a higher yield investment, the number just gets bigger.

Just be little careful, because your change in cash flow may have no effect on your taxes. That means you can realize a cash flow loss, but have taxable income. The interest expense from cash out refinance cannot be claimed against the property you took the cash against (if it goes over purchase value). IRS rules dictate that deductibility follows use. The interest from the cash out portion can be deductible against a new purchase, so you want to redeploy that cash. Make sure you keep the money separate and do not use anything for personal use (buying a car, vacation, personal home, etc.) You want to be able to trace every penny and track your interest accordingly. Talk to your accountant about this to avoid an audit surprise.

This is the part of BRRRR that nobody talks about; in most cases you are leveraging over your purchase price and it often results in negative cash flow. That doesn't mean it is a bad idea, but it does mean you need to redeploy that cash into other investments that produce more income.

I would only go through with the loan if I had plans to invest the cash out money.

Yes, my entire reason for doing the cash out refinance is to get into multifamily and get more doors/cashflow for the portfolio. But it seems crazy to me, because I did the same math you, I figured that with a 6% return it's only be $2,800/month. Which would translate to $1,815.56ish NOI, from the $3,268.69 NOI that I enjoy now. So for me it doesn't seem to make sense that I'd be borrowing so much money, paying interest, paying all these closing costs, and paying so much more for additional flood insurance, to make $1,453.53 less than I make now. It'd take 10-15 years to get back to the NOI that I enjoy now.

OP

Member since 2019 · 35 posts · 9 votes

5y

Originally posted by @David A Lisowski:

@Paul O'Connor

Get other flood insurance quotes.

Borrow less until the payments are reduced enough to get back to positive cash-flow or buy a lower interest rate or combination of both.

Raise the rents.

A different lender won't get you out of flood insurance. The flood certificate determines that.

Been working on raising the rents, it's a hard pill to swallow for tenants that the rents keep going up. And they're good, paying tenants. But every time a lease comes up for renewal, the tenants get hit with a $50-$100 rent increase. Looking at the market rents... a few of the houses are a couple hundred under market rent. I think a $200-$250 increase in one shot, would severely aggravate the tenant. They usually get an attitude about a $100 increase.

Joe S.Pro Member

Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes

5y

Originally posted by @Paul O'Connor:

Originally posted by @Joe S.:

I know this sounds simple, but have you talked to a different insurance company as well? We had someone quote us a $7500 a year quote on a flood policy and then another insurance carrier offered one under $1000. Just an idea worth a shot.

Which insurance company offered you the one under $1,000? I'd like to reach out to them.

It was for a property in Mississippi. So unless your properties in Mississippi you would need to check out more than one Producer in your geographical area.

OP

Member since 2019 · 35 posts · 9 votes

5y

Originally posted by @Joe S.:

Originally posted by @Paul O'Connor:

Originally posted by @Joe S.:

I know this sounds simple, but have you talked to a different insurance company as well? We had someone quote us a $7500 a year quote on a flood policy and then another insurance carrier offered one under $1000. Just an idea worth a shot.

Which insurance company offered you the one under $1,000? I'd like to reach out to them.

It was for a property in Mississippi. So unless your properties in Mississippi you would need to check out more than one Producer in your geographical area.

I've checked out several and I even ended up going to an insurance broker to have them reach out to more companies. The company you use, only does flood insurance in Mississippi?

Jon KellyPro Member

Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes

5y

@Paul O'Connor Probably doesn't make sense to refi at 75% LTV if they won't cashflow. Sounds like 3 options are:

1. Sell all properties and use the $750k+ to buy larger multi-family

2. Refi only the 1 property that is not in a flood zone and do nothing with the other 4 or sell them

3. Shop around for cheaper insurance

These properties don't meet the 1% rule anymore. They were probably great investment properties to begin with, but have seen strong appreciation. The best way to capitalize on the built-up equity is to sell.

3 Reply

OP

Member since 2019 · 35 posts · 9 votes

5y

Originally posted by @Jon Kelly:

@Paul O'Connor Probably doesn't make sense to refi at 75% LTV if they won't cashflow. Sounds like 3 options are:

1. Sell all properties and use the $750k+ to buy larger multi-family

2. Refi only the 1 property that is not in a flood zone and do nothing with the other 4 or sell them

3. Shop around for cheaper insurance

These properties don't meet the 1% rule anymore. They were probably great investment properties to begin with, but have seen strong appreciation. The best way to capitalize on the built-up equity is to sell.

Yeah, that's the feeling that I'm getting too... so I have to decide which option to choose. Might sell the 4 in the flood zone, and cash out refinance the one, might just sell all 5, or I might just hold all 5 and go the long way around.

Susan Maneck

Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes

5y

Originally posted by @Paul O'Connor:

Originally posted by @Joe Norman:

As suggested above you could not borrow as much to keep your payment down and your profit up. Another thought is to leverage your equity with a HELOC - maybe you can find a lender who will do one of them without flood insurance. Good luck!

I reached out to every lender in the area and was told the same thing. None of them will do HELOCs on investment properties. I was told them wouldn't do commercial loans on residential properties and they wouldn't do residential loans on investment properties. I've had a lot of trouble even finding a lender, until I reached out to mortgage brokers.

Wells Fargo will do HELOCs on rental properties but they require flood insurance as well. However, I've been able to keep my interest rates well below 4% and the only closing cost on those is the appraisal. They are what I use for BRRR.

Susan Maneck

Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes

5y

Originally posted by @Daniel Reeder:

@Paul O'Connor Flood insurance is not a good product and sucks the cash flow out of what should be a profitable property as you are experiencing.

I would agree, but there is also private flood insurance which lenders will accept. It is a bit less, but not by much.