Lender Won't Cash-Out 100% of Cost in Memphis

5 Replies

Howdy all! 

I am an investor here in Memphis, TN. Currently up to 7 buy-and-hold units. I recently came upon the perfect BRRRR - one in which an 85% ARV LTV Cash-Out Refinance would return all of my initial out-of-pocket cash for the purchase and rehab.

I have my "regular" local bank lender here, we have done previous cash-out refinances, construction loans, 85% LTV investment loans, you name it.

However, when I went to speak to my lender about this deal, they weren't keen on the idea of me having no "skin in the game." AKA, they were only willing to refinance up to the point in which I still had 15% CASH invested of the ARV. For reference, the numbers for this deal are as follows:

Purchase: $100k (Purchasing with 15% down, loan balance $85k)

Rehab: $10k

ARV: $135k (New loan balance assuming 85% LTV refinance $114,750)

As the lender stated, I'd effectively have no skin in the game once the deed was done, or at most $5k due to an overage in rehab, closing costs or carrying costs. 

Just wondering if anyone else has had issues with convincing lenders to cash out your full cost basis? Also to note here there are no issues with approving this due to income or credit. Pretty strong there. 

Thanks all!

Hi Reed, did the local lender mention anything about seasoning requirements? Most lenders take a cost approach if you are trying to refinance prior to owning the property for 6 months. After 6 months however, they will use the as stabilized or current value as well as the income approach from tenant occupancy. You still have a couple mortgage to go before you max out on conventional, but it may be time to start researching b2b commercial loans in your LLC or entity name to avoid these types of issues. Hope this helps. Thanks

@Reed Rickenbach Actually 85% LTV is pretty good for many lenders traditionally. (Now things may be a little more lax) Most lenders want to do 75 or 80% max LTV. To expect to to finance a property at purchase with no "skin in the game' is just not realistic. It does happen as you apparently have done yourself. But it is not the norm.

Normally as @Craig Yarnell said you finance one way to purchase the property and then after a period of "Seasoning" you refinance to get most or all of your money out. That is what one of the "Rs" is in BRRRR is, refinance.

Most deals most of the time simply don't work for BRRRR. It works better now due to loose lending standards and the hot appreciating market. It is not as easy or guaranteed as articles may imply.

@Craig Yarnell they did not - although since posting we have worked the terms to only be $5k down and funding the rehab with my cash. So we met somewhere in the middle. 6 of the 7 loans are already commercial loans to my LLC so good on that front. Thanks for the reply!

@Ned Carey I agree, 85% LTV is great! I know typically the purchase and rehab is made with private money or hard money in a BRRRR - in this case I was purchasing a property with long-term financing anyway and realized that I would create enough equity to return my capital if I were to refinance @ 85% LTV once repairs were made. I think it is mostly due to the lack of a seasoning period. As I mentioned above I have since worked with the lender to meet in the middle. Thanks for the reply!

@Reed Rickenbach of course, as you're probably aware, you can get 90% of purchase & 100% of rehab from a hard money lender (if your deal needs a rehab hold-back). On the refinance, with as little as 3 months of seasoning, you can get 80% LTV on a cash-out w/ a DSCR lender (30 yr fixed based on property cash-flow) -- there's no cap on the loan not exceeding your cost basis.