cash out refinancing strategy
Investor · Conifer, CO · Member since 2013 · 69 posts · 11 votes
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?
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.
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
Your Private money is a loan, and therefor not actually cash for this purpose.
The lender gets an appraisal, $175 fee on the LOC, no p[re-pay penalty
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
I think the point of the line of credit is so you don't have to wait the 6 months and you can purchase another deal immediately and keep things rolling.
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.
Not stupid question.
Not the same lending source...two different appraisals, but the lender on the LOC covers the cost of theirs....it's internal.
Appraisals are good for only 2 months anyway
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
I think the point of the line of credit is so you don't have to wait the 6 months and you can purchase another deal immediately and keep things rolling.
Correct.
@Daniel Levine
It's imperative that you note that after the 4th mortgage the guidelines for conventional financing change.
If you have no landlord experience all your mortgages need to be done through Fannie. From 5 - 10 you’ll have to qualify for delayed financing which requires a minimum of a 720 fico and a minimum of 6 months reserves.
The major difference with delayed financing is that you have to cash out on the home within 6 months of owning it. Since you can get cash out on new appraised value after 6 months you'll only be able to get 60 - 70% of the PURCHASE price.
Make sure you consult a Loan Officer or a Broker that has a lot of experience so that you can buy all of your homes quickly and efficiently.
Listen to my interview on the Joe Fairless Show; link is on my profile and this will give you some other ideas.
Great posts on this thread and I hope this one helps as well.
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.
Not stupid question.
Not the same lending source...two different appraisals, but the lender on the LOC covers the cost of theirs....it's internal.
Appraisals are good for only 2 months anyway
I recently refied and got a LOC on my house it took two appraisals the bank covered one appraisal and I paid for the second. This was with UMB bank. I am not sure why they required two back to back but they did.
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.
What you need is a "Cash Like Substance"...non-lien able debt. It works just like cash since it isn't lienable to the property you are using it on. This means you can use it over and over again and pay it back over time. HML is still lienable...but you need to learn to like HML. Look at it not as a loan, but the cash from it as a part of the rehab...like the new floor, kitchen, etc...and the points and monthly interest charge is just the cost of the money. When you do the rehab analysis, just add the cost of the HML to it like you would the cost of the kitchen.
I'm probably missing something, but you mentioned that you can rinse and repeat this process over and over.... but if its a limit of 10/person, how can we repeat this after the 10th time?
@Daniel Levine
It's imperative that you note that after the 4th mortgage the guidelines for conventional financing change.
If you have no landlord experience all your mortgages need to be done through Fannie. From 5 - 10 you’ll have to qualify for delayed financing which requires a minimum of a 720 fico and a minimum of 6 months reserves.
The major difference with delayed financing is that you have to cash out on the home within 6 months of owning it. Since you can get cash out on new appraised value after 6 months you'll only be able to get 60 - 70% of the PURCHASE price.
Make sure you consult a Loan Officer or a Broker that has a lot of experience so that you can buy all of your homes quickly and efficiently.
Listen to my interview on the Joe Fairless Show; link is on my profile and this will give you some other ideas.
Great posts on this thread and I hope this one helps as well.
This is true in some cases...it depends on the sources. Not all sources are through banks. My 6 month loan is through a broker. That source will do up to 10 with no changes in qualification...and, include the income from the previous properties in my debt/income ratio....and I can get 75% of the ARV
I'm probably missing something, but you mentioned that you can rinse and repeat this process over and over.... but if its a limit of 10/person, how can we repeat this after the 10th time?
Partners.
@Daniel Levine
It's imperative that you note that after the 4th mortgage the guidelines for conventional financing change.
If you have no landlord experience all your mortgages need to be done through Fannie. From 5 - 10 you’ll have to qualify for delayed financing which requires a minimum of a 720 fico and a minimum of 6 months reserves.
The major difference with delayed financing is that you have to cash out on the home within 6 months of owning it. Since you can get cash out on new appraised value after 6 months you'll only be able to get 60 - 70% of the PURCHASE price.
Make sure you consult a Loan Officer or a Broker that has a lot of experience so that you can buy all of your homes quickly and efficiently.
Listen to my interview on the Joe Fairless Show; link is on my profile and this will give you some other ideas.
Great posts on this thread and I hope this one helps as well.
This is true in some cases...it depends on the sources. Not all sources are through banks. My 6 month loan is through a broker. That source will do up to 10 with no changes in qualification...and, include the income from the previous properties in my debt/income ratio....and I can get 75% of the ARV
When I post I only quote Fannie and Freddie guidelines. So in your case it's a portfolio loan that isn't sold to Fannie or Freddie. But that is a great contact; do they do loans throughout the country or only your home state?
@Daniel Levine
It's imperative that you note that after the 4th mortgage the guidelines for conventional financing change.
If you have no landlord experience all your mortgages need to be done through Fannie. From 5 - 10 you’ll have to qualify for delayed financing which requires a minimum of a 720 fico and a minimum of 6 months reserves.
The major difference with delayed financing is that you have to cash out on the home within 6 months of owning it. Since you can get cash out on new appraised value after 6 months you'll only be able to get 60 - 70% of the PURCHASE price.
Make sure you consult a Loan Officer or a Broker that has a lot of experience so that you can buy all of your homes quickly and efficiently.
Listen to my interview on the Joe Fairless Show; link is on my profile and this will give you some other ideas.
Great posts on this thread and I hope this one helps as well.
This is true in some cases...it depends on the sources. Not all sources are through banks. My 6 month loan is through a broker. That source will do up to 10 with no changes in qualification...and, include the income from the previous properties in my debt/income ratio....and I can get 75% of the ARV
When I post I only quote Fannie and Freddie guidelines. So in your case it's a portfolio loan that isn't sold to Fannie or Freddie. But that is a great contact; do they do loans throughout the country or only your home state?
MAny states
@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.
Refi happens after rehab. Closing costs are a lot less than conventional.
Who are you doing the refi with?
@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.
Refi happens after rehab. Closing costs are a lot less than conventional.
Who are you doing the refi with?
Local Broker
I'm probably missing something, but you mentioned that you can rinse and repeat this process over and over.... but if its a limit of 10/person, how can we repeat this after the 10th time?
Partners.
Joe, This is a terrific technique. .Have you experience refinance concerns in this strategy when properties are under LLC partnerships?
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.
No. All you need is enough cash for the 1st deal. All the following deals are funded with the refi's from the previous deals.
I'm probably missing something, but you mentioned that you can rinse and repeat this process over and over.... but if its a limit of 10/person, how can we repeat this after the 10th time?
Partners.
Joe, This is a terrific technique. .Have you experience refinance concerns in this strategy when properties are under LLC partnerships?
All of our deals are in LLC's.
I'm probably missing something, but you mentioned that you can rinse and repeat this process over and over.... but if its a limit of 10/person, how can we repeat this after the 10th time?
Partners.
Joe, This is a terrific technique. .Have you experience refinance concerns in this strategy when properties are under LLC partnerships?
Every property is under its own LLC, but every loan is personal.
.............. 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.
No. You only need enough for the first deal, as long as the rest of the deals following it are in the same price range. The first REFI (it's actually an Equity Loan) happens as fast as 2 weeks, but let's say between rehab, appraisers schedule, etc... it takes 2 months. Then the actual refi I use to hold takes 6 months of seasoning (ownership...not just ental seasoning). The 2nd Refi pays off the EQuity Loan. Here's how it works:
Time(apprx) Prop # Event Cash In Cash Out Cash Flow Cost (New $ Need)
2 Month (2) 1 LOC $50k $55k $250/m $50k
2 (4) 2 LOC $50k $55k $250(500) 0
2 (6) 3 LOC $50k $55k $250(750) 0
1 REFI 0 $ 5k $100(850) 0
2 (8) 4 LOC $50k $55k $250(1100) 0
2 REFI 0 $ 5k $100(1200) 0
2 (10) 5 LOC $50k $55k $250(1450) 0
3 REFI 0 $ 5k $100(1550) 0
2 (12) 6 LOC $50k $55k $250(1800) 0
4 REFI 0 $ 5k $100(1900) 0
Summary 6 $50k $100k $1900/month $50k
(approx...numbers will vary)
1 -The Cash in total is only $50k since the refis let me use the same money over and over
2 -The Cash Out represents the spread from each Cash In/Out event total
3 -The Cash Flow shows $250 for each LOC event, and an added $100 for each REFI
4 -Cost (New $$) Total is only $50k since I use the same money over and over. Note that when/if I decide to stop doing this, the last refi gets me back the original $50k...thus, I never really spend it.
5 - Notice that I've actually turned my $50k into $100k, so I can start another line of repeating deals with these funds too.
@Mike Carino (here's a good way to rinse and repeat)
Hi Daniel!
This strategy is a really good one when it comes to growing your portfolio. However, doing so with Single Family Homes (SFH) will make you hit a wall at some point where the bank won't loan to you anymore. In the US, I think it's around 10 loans/ person. I live in Canada, we don't have this kind of limit nor the seasoning thing as far as I know (but that's not the point). Here's a solution regarding your strategy as it is the one I want to use as well :
When you hit that wall, the point where you can't have loans anymore, let's say you have 10 loans for 10 SFHs, here's what you can do:
Sell them all, cash out, buy an apartment complex with a commercial loan (since the financing doesn't take into account your personal debt ratio) and start all over again with SFH. See, let's say after 3 years, you have 10 SFH worth 100K and financed at 80% (80K loan) and 20K equity in it.
Sell them. This will leave you with 200K (10x20K) (I won't consider tax for this example).
Of this 200K, take 150K and buy a 600K apartments complex (let's say a 8 units since I don't know your market).Put 150K down and finance the rest with a commercial loan for 450K.
Keep 50K of the 200K and start again building your SFH portfolio following the Buy/Rehab/Rent/Refinance. But this time, you have a 8 units bringing in additional cashflow, appreciation and mortgage amortization.
Take note that selling all your SFH might not get done in 2 months...Also, you'll have to deal with the tenants or sustain empty homes while trying to sell them, pay commissions to broker, etc. Personally, I suggest you to sell maybe 3 at a time. This will surely not be as easy as it seems...but hey, we're talking about real estate, nothing is easy.
Also, assuming you bought all you SFH without your own money (private money), you now have a 600K apartment complex without even touching your own money. ;) Isn't real estate the most wonderful thing in the world?
Best regards,
Kevin
Can you talk about any negatives or drawbacks to this approach?
@Mike Carino (here's a good way to rinse and repeat)
Hi Daniel!
This strategy is a really good one when it comes to growing your portfolio. However, doing so with Single Family Homes (SFH) will make you hit a wall at some point where the bank won't loan to you anymore. In the US, I think it's around 10 loans/ person. I live in Canada, we don't have this kind of limit nor the seasoning thing as far as I know (but that's not the point). Here's a solution regarding your strategy as it is the one I want to use as well :
When you hit that wall, the point where you can't have loans anymore, let's say you have 10 loans for 10 SFHs, here's what you can do:
Sell them all, cash out, buy an apartment complex with a commercial loan (since the financing doesn't take into account your personal debt ratio) and start all over again with SFH. See, let's say after 3 years, you have 10 SFH worth 100K and financed at 80% (80K loan) and 20K equity in it.
Sell them. This will leave you with 200K (10x20K) (I won't consider tax for this example).
Of this 200K, take 150K and buy a 600K apartments complex (let's say a 8 units since I don't know your market).Put 150K down and finance the rest with a commercial loan for 450K.
Keep 50K of the 200K and start again building your SFH portfolio following the Buy/Rehab/Rent/Refinance. But this time, you have a 8 units bringing in additional cashflow, appreciation and mortgage amortization.
Take note that selling all your SFH might not get done in 2 months...Also, you'll have to deal with the tenants or sustain empty homes while trying to sell them, pay commissions to broker, etc. Personally, I suggest you to sell maybe 3 at a time. This will surely not be as easy as it seems...but hey, we're talking about real estate, nothing is easy.
Also, assuming you bought all you SFH without your own money (private money), you now have a 600K apartment complex without even touching your own money. ;) Isn't real estate the most wonderful thing in the world?
Best regards,
Kevin
I've used this strategy too...but it all depends on your market. In mine, SFH are a better return/door than multi. My solution to hitting the 10 loans is to take on credit partners...and I just keep rolling. I don't get to keep all the profit/CF, but neither does Ford or GM when they churn out cars from their assembly lines. I still make very good CF/profits and I more than make up the lower amount with the volume.
Can you talk about any negatives or drawbacks to this approach?
Problem: The maximum number of loans is usually around 10.
Solution: Partners...just like any other assembly line.
P: Property Management due to volume
S: Hire PM's...which I do anyway
P: Available Properties in Market
S: I'm always Analyzing my markets as well as looking for new ones
P: Problem Tenants
S: Wait, that's always a problem and has nothing to do with this system. I just have my PM deal with it.
P: Vacancies.
S: See answer above
P: CAPEX
S: See answer above. I don't cover this with any % from the rent...I take the extra funds at the time of Cash Out Refi and put them into a Cash Reserve to cover for this
P: Too much Cash, not enough Credit Partners.
S: Not going to happen.
P:....you tell me??
Great to hear that Joe ! I guess it also depends on what you want and who you work with. Personally, I really prefer multi but everyone is different so :) Also, I would find it more difficult to find partners willing to put their credit on the line instead of just loaning me more money. Both ways are good. You just have to go with whatever makes you feel more comfortable :)
Great to hear that Joe ! I guess it also depends on what you want and who you work with. Personally, I really prefer multi but everyone is different so :) Also, I would find it more difficult to find partners willing to put their credit on the line instead of just loaning me more money. Both ways are good. You just have to go with whatever makes you feel more comfortable :)
I thought finding credit partners would be an issue too. It's not. Quite the opposite.