cash out refinancing strategy

86 Replies

I was thinking about a new strategy for growing a rental portfolio and was looking for some advice. I want to purchase REOs with all cash fix them up, rent them out, then pull my original investment out, or at least a substantial part of it so I can do it all over again. What I don't know are the banks restrictions. First do I need to wait a year before I can pull out the equity? What LTV will the banks require, meaning how much can I pull out? How many times will traditional banks allow me to repeat the process? Are there any pitfalls that I should be aware of? Thanks.

For example, if I purchase a house for 40k, put 20k into it and have a ARV of 80k. I then put a renter in for 1200 per month. Can I pull out my original 60k investment?

"You rang?"

I do this all the time, I use this as my main strategy, and I teach it. It works better than any other system or plan I have seen in the over 30 years since I started REI.

Originally posted by @Joe Villeneuve :

"You rang?"

I do this all the time, I use this as my main strategy, and I teach it. It works better than any other system or plan I have seen in the over 30 years since I started REI.

 Are you using commercial loans?

I have not done it yet I was considering using conventional loans rather than commercial.

my experience is that my conventional lender won't lend on a just purchased property for at least one year and then up to 80% depending on your credit and income.  Your income ratios improve after you have managed a first rental for 2 years, because the *potential* income from the 2nd rental is added to your income for figuring the ratios.

Originally posted by @Joshua Woolls :
Originally posted by @Joe Villeneuve:

"You rang?"

I do this all the time, I use this as my main strategy, and I teach it. It works better than any other system or plan I have seen in the over 30 years since I started REI.

 Are you using commercial loans?

No. Conventional refi's for NOOcc. 6 month seasoning gets me 30 yr amort., 4.5%, at 75% ARV. I'm in the process of lining up an added option for 85% ARV for 30 too.

10 loans/person.

Originally posted by @Tammy Vitale :

my experience is that my conventional lender won't lend on a just purchased property for at least one year and then up to 80% depending on your credit and income.  Your income ratios improve after you have managed a first rental for 2 years, because the *potential* income from the 2nd rental is added to your income for figuring the ratios.

 6 months seasoning in order to do a cash out refi.

I can also do an immediate Equity Loan (with an all cash deal I have 100% equity) at 70% ARV for 3.875% (NonOwnerOcc), 15 yr amort. No pre-pay penalty. The last one I did took 14 days to cash...had to wait 10 days for the appraisal.

I get my cash all out using the LOC immediately, then take out that with the refi in 6 months, which I use to hold the property. The 30yr amort vs. the 15 yr saves me about $100/month.

I don't pay 100% cash.  I use 25% down conventional loans so I don't need a heloc to get the equity back because I never put it in.  I can get a loan at 6 months but based on the original purchase price of the property, not purchase plus rehab.  After one year I can take $$ out based on a new appraisal.  That's just my experience. And I pretty much stick with one lender because she makes it so easy for me up front.  And I'm not doing more than one purchase a year, most years, anyways.

Interesting, is there a limit on the LOC because I have an LOC on my first house that I am using for a flip deal, and hope to continue to use. I guess it depends on the house. So one year if I need them to uuse the ARV.

Well guys. When I started REI was in the late 70's early 80's when owner financing was very popular in investment properties. I have read that owner financing may be coming back strong with in the next 5 years due to the new bank regulations making it hard for banks to decide on making loans. Anyway, my strategy then was to buy cheap so that I could rehad the units within 3 years using the rental income. This allowed me to double the rents and double the property value so that I could refinance and use that money to purchase more properties. With in 5 years I owned 40 rental units in 6 buildings giving me a net income after taxes close to $40,000.00 yearly. The loans on the properties were fixed rate 30 year amortized no call and no assumptions. I have since sold these properties a long time ago. My idea then was not to borrow rehab money but to do the work myself, being in my 20's, and let appreciation and remodeling do it's thing to build equity.

Originally posted by @Tammy Vitale :

I don't pay 100% cash.  I use 25% down conventional loans so I don't need a heloc to get the equity back because I never put it in.  I can get a loan at 6 months but based on the original purchase price of the property, not purchase plus rehab.  After one year I can take $$ out based on a new appraisal.  That's just my experience. And I pretty much stick with one lender because she makes it so easy for me up front.  And I'm not doing more than one purchase a year, most years, anyways.

 I do all cash in, and get it all back out with the refi...then use the same cash on the nest deal..repeat, and repeat, and ...in the end I never spend any money.  All the deals have NCF over $300/month with a property manager in place.  I don't need new cash since I use the same fash over and over again.  This also means I can, based on property availability, do all 10 deals within a years time (in theory).  Due to negotiations taking time, and rehab timing, the average is between 4 - 7 per year...never spending the money, using the same money.

The numbers:

Average cost per deal including rehab, fess, etc...)          $50,000 - 60,000
Average ARV $80,000 - 92,000
75% REFI (6 month)                                                          $60,000 - 69,000
Average cash out at refi, an additional...                           $ 3,000 - 10,000
Average number of houses per year                                        4  - 7
Minimum added NCF per year (avg. $300/deal)               $  1,200 - 2,100/month
Equity is still around 25% per property

Cash spent total per year                                                    $  0

One of the many added advantages to this strategy is I can outbid most other offers since I can offer more than the AP, as long as my total cost doesn't exceed the 75% of the ARV, since I get it all back at refi.

There is an awesome podcast by @Brandon Turner called BRRR

Buy

Rehab

Refi

Repeat

Watch it and it will teach you alot.  You can do cadh out refi with delayed refi.  Has certain requirement's or you can go to local bank or credit union and start the process less than 6 months.  The min.  season requirements are 6 months.

Google Fannie Mae guidelines.  Also, listen to the podcast from this week.  It has tons of invaluable information about loana and the amount you can qualify for...

Originally posted by @Daniel Levine :

Interesting, is there a limit on the LOC because I have an LOC on my first house that I am using for a flip deal, and hope to continue to use. I guess it depends on the house. So one year if I need them to uuse the ARV.

 Limit in what way?

@Daniel Levine

 We just used this strategy for the first time.  We were able to refinance on the new appraised value at less than one year.  The rehab took more than six months, so I don't know if we could have done it in less than six months.  The loan was from a credit union @ 4.75% fixed for 30 years.  Our project was pricier than @Joe Villeneuve 's purchases, and it took us a long time to complete the rehab.  We went way over budget on the rehab because of unforeseen problems with just about every part of the house we purchased.  Despite creating nearly $40k in equity doing the rehab, we will end up with some cash trapped in the house, so it was not a total success.

In any event, you can see more about it here...

http://www.biggerpockets.com/forums/223/topics/206...

Originally posted by @Joe Villeneuve :
Originally posted by @Daniel Levine:

Interesting, is there a limit on the LOC because I have an LOC on my first house that I am using for a flip deal, and hope to continue to use. I guess it depends on the house. So one year if I need them to uuse the ARV.

zzz xLimit in what way? In the amount of LOC you can have total.

Originally posted by @Joe Villeneuve :
Originally posted by @Tammy Vitale:

I don't pay 100% cash.  I use 25% down conventional loans so I don't need a heloc to get the equity back because I never put it in.  I can get a loan at 6 months but based on the original purchase price of the property, not purchase plus rehab.  After one year I can take $$ out based on a new appraisal.  That's just my experience. And I pretty much stick with one lender because she makes it so easy for me up front.  And I'm not doing more than one purchase a year, most years, anyways.

 I do all cash in, and get it all back out with the refi...then use the same cash on the nest deal..repeat, and repeat, and ...in the end I never spend any money.  All the deals have NCF over $300/month with a property manager in place.  I don't need new cash since I use the same fash over and over again.  This also means I can, based on property availability, do all 10 deals within a years time (in theory).  Due to negotiations taking time, and rehab timing, the average is between 4 - 7 per year...never spending the money, using the same money.

The numbers:

Average cost per deal including rehab, fess, etc...)          $50,000 - 60,000
Average ARV $80,000 - 92,000
75% REFI (6 month)                                                          $60,000 - 69,000
Average cash out at refi, an additional...                           $ 3,000 - 10,000
Average number of houses per year                                        4  - 7
Minimum added NCF per year (avg. $300/deal)               $  1,200 - 2,100/month
Equity is still around 25% per property

Cash spent total per year                                                    $  0

One of the many added advantages to this strategy is I can outbid most other offers since I can offer more than the AP, as long as my total cost doesn't exceed the 75% of the ARV, since I get it all back at refi.

 I am so excited to try this!!! I guess you need enough cash to purchase 6 months worth of inventory so you can do the 4-7 deals a year. 

I  have not done one yet but I believe if the investor is Freddie Mac, that you can do "Delayed Financing" where you buy with cash today and refi after the rehab to get your 75% cash out based on new appraised value.

You do not need to wait the 6 months seasoning!

@Joe Villeneuve I would love to adopt your model! I assume you have to take on credit partners who is comfortable with leverage and have the available loans in order to keep that train rolling. 

For those of us wondering, how would it affect your strategy if the initial purchase was a loan? I assume there's the extra closing costs and one would need two available loans; one acquisition, one for refi. 

Originally posted by @Justin B. :

@Joe Villeneuve I would love to adopt your model! I assume you have to take on credit partners who is comfortable with leverage and have the available loans in order to keep that train rolling. 

For those of us wondering, how would it affect your strategy if the initial purchase was a loan? I assume there's the extra closing costs and one would need two available loans; one acquisition, one for refi. 

 I'm not Joe, but I think one issue may be that a bank may not be willing to finance the acquisition of the property based on its pre-rehab condition.  Closing costs is a big extra cost.

Originally posted by @Joe Villeneuve :
Originally posted by @Tammy Vitale:

my experience is that my conventional lender won't lend on a just purchased property for at least one year and then up to 80% depending on your credit and income.  Your income ratios improve after you have managed a first rental for 2 years, because the *potential* income from the 2nd rental is added to your income for figuring the ratios.

 6 months seasoning in order to do a cash out refi.

I can also do an immediate Equity Loan (with an all cash deal I have 100% equity) at 70% ARV for 3.875% (NonOwnerOcc), 15 yr amort. No pre-pay penalty. The last one I did took 14 days to cash...had to wait 10 days for the appraisal.

I get my cash all out using the LOC immediately, then take out that with the refi in 6 months, which I use to hold the property. The 30yr amort vs. the 15 yr saves me about $100/month.

 Joe

In this above what is the purpose of the Line of credit? I am doing a all cash deal with 50% private money and 50% from savings. I think the line of credit would be a great option to pay back the private money while waiting for the seasoning period aND would have a lower rate.

Questions

Do you get an apprasial for  the loc?

Are there closing cost for the loc?

Thank you

Originally posted by @Marc Jolicoeur :

I  have not done one yet but I believe if the investor is Freddie Mac, that you can do "Delayed Financing" where you buy with cash today and refi after the rehab to get your 75% cash out based on new appraised value.

You do not need to wait the 6 months seasoning!

 Yes...but only the original cost you put in.  To do a cash out you need 6 months seasoning...which is shy I do the Equity Loan out of the gate so I can out my cash back to work ASAP

Originally posted by @Stephen 

 I'm not Joe, but I think one issue may be that a bank may not be willing to finance the acquisition of the property based on its pre-rehab condition.  Closing costs is a big extra cost.

Yes I've been hitting that brick wall a lot the past couple months. I visit plenty of homes that would be great for this strategy but are cash only deals. In fact, just a couple days ago I had an offer rejected because they decided at the last minute that the property was cash only. I'm still shy to the HML route.

Originally posted by @Daniel Levine :
Originally posted by @Joe Villeneuve:
Originally posted by @Daniel Levine:

Interesting, is there a limit on the LOC because I have an LOC on my first house that I am using for a flip deal, and hope to continue to use. I guess it depends on the house. So one year if I need them to uuse the ARV.

zzz xLimit in what way? In the amount of LOC you can have total.

70% ARV...so it happens right after the rehab.

May be a stupid question, but if you use the same bank will they use the same appraisal from the line of credit as they do the refi a few months later?

I have to think freshly rehabbed property that is empty will appraise higher then one with a tenant that just moved in. 

Originally posted by @Justin B. :

@Joe Villeneuve I would love to adopt your model! I assume you have to take on credit partners who is comfortable with leverage and have the available loans in order to keep that train rolling. 

For those of us wondering, how would it affect your strategy if the initial purchase was a loan? I assume there's the extra closing costs and one would need two available loans; one acquisition, one for refi. 

 The initial purchase isn't a loan...it's all cash.  There's no point if you buy with a loan.

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