Cash buy -- Rent out -- Refinance?

Question

In another thread I asked about workarounds to being unable to get a mortgage. One person suggested that I could refinance after buying a place with cash and renting it out, the idea being that having occupants paying at least enough to cover a monthly loan payment and expenses would make a loan feasible.

I have two questions: Is this a good idea? If so, how long after getting tenants in the place would I be able to refinance?

Also, I'm curious, what route do most people go if they can't get a mortgage? People talk about creative financing, but what kind of creative financing is most popular? I'm not a wheeler dealer kind of person. I like things simple. Which is why cash buy/refinancing appeals to me.

Grateful for thoughts on any or all of these questions.

Josh Caldwell · Answer

Mike

I am a wheeler dealer but I will try to keep this simple.  So feel free to ask follow up questions if i dont explain this well.

First off, never buy anything where rent doesnt cover the payments, that sort of buying isnt investing that is speculation, and you can learn a very expensive less there. Dont do that ever.

Now back to investing.   There is more than one way to do what you are trying to do.   If you want to get your cash back quickly, you can refi out.  that will generally take between 6 months and one year of seasoning.

How about you look at owner financing.   That way you preerve your cash, and there is no need to refi because you cash is not in the deal.  Spend some time here on BP reading about subject-to deals.   I have bought a lot of houses with less than $100 in the deal.  All you need is a little understanding of the technique, a RE lawyer, and a motivated seller.

I hope that helps

Josh

Michael Hayworth · Answer

As CC says, you're going to want to talk to a portfoilio lender. These will typically be smaller, local banks. I use two different portfolio lenders, and FHA guidelines are irrelvant to me. Both still have pretty strict guidelines about what they will and won't finance. I'm able to pay cash for a property, then start the refi process 1 day after closing, if I want. (Usually, I want until reno is done because the refi amount is based on appraisal.)

Someone from BP in your area may be able to recommend a few portfolio lenders for you, but you could also start by simply calling smaller, local banks in your area and asking, and then if they aren't what you want, asking them who they'd recommend you call.

Che Chiu Wong · Answer

1) yes, it works. This is based on personal experience.

2) you don't have to wait For tenant seasoning.  Has to do more with when you get the property, amount of rent etc.

For residential loan (single family, small multis), talk to a mortgage specialist in a bank (or do it yourself, read the Fannie Mae guideline, google it, it is long but if you are willing to spend time, it is readable.)

For commercial loan, has to talk to the loan officer.  A warm introduction from someone you know helps.

Che Chiu Wong · Answer

@Michael Hayworth  To further Michael's point, ask investors around your area too.  Chances are they have loans and know who to talk to!  Easier to start conversation if you know the VP of Commercial Lending in that local bank.

Che Chiu Wong · Answer

@Mike Girard

To clarify: my previous comment was for tenant seasoning, meaning you can have a tenant even if he/she just moved the day before.  Josh is most likely talking about purchase seasoning, meaning the time between your house purchase date and the day you get your refinance.  As you may see, they are two similar but different concepts.

A lot of banks will require you to wait at least 6 months after purchase date, before getting your refinance, if you want to get more money out (or else max at X% of Purchase Price). This is part of Fannie Mae guideline.  Will take very long to explain here.

The key point is: To get max money out, you may sometimes need to wait before you refinance.

That said, I have had one case where I was able to get a refinance within 6 months of purchase date.  That's because this bank does NOT follow Fannie Mae guideline; it issues loans that are called "portfolio loan", ie. the bank keeps this loan on its own books and has full discretion as to what criteria they use to qualify lenders.

Action point is: Go to different banks and ask what their criteria are.  Mortgage Development Officers can tell you that.  If you don't mind paying some fee, mortgage brokers work too.

Mike Girard · Answer

Thanks CC, that's really helpful.  I'm planning to sit down with a mortgage officer in a few weeks. You say I don't need seasoning to refinance. Josh says I need 6 mths to a year. I'm curious about the discrepancy.

Josh,

If I said something that suggested I was doing that, I was simply unclear. I am not a speculator. My main interest is cash flow from rent. Appreciation is nice but its secondary. It's gotta pay for itself right off the bat.

You're the second person who's recommended owner financing. Have no idea what subject-to is but I'll read up. Thanks for the tip.

Cash buy --> Rent out --> Refinance?

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