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.
After you accumulate dozens of loans, let them marinate for a couple years on your tax returns... then refinance them all into a commercial pool loan, cross collateralizing the debt. If you get the right commercial lender they will let you pull out equity, new capital that will be tax free. This is a step to expanding your mind and business.
Frank
After you accumulate dozens of loans, let them marinate for a couple years on your tax returns... then refinance them all into a commercial pool loan, cross collateralizing the debt. If you get the right commercial lender they will let you pull out equity, new capital that will be tax free. This is a step to expanding your mind and business.
Frank
That's correct.
@Joe Villeneuve I have done my first project based off of your idea's and want to say thank you. I am not sure which post it was but it was some time last year where I saw you speaking of this process on a forum in BP, and I thought to myself "why not". I wasn't able to pull out all of my cash that I had put in but only having around 15k in a 195k appraised property I will take. I just wanted to give credit where credit was due for the idea, so thank you. And for those wondering yes it does work even in California :), It just costs a bit more up front and the cash flow is not as great, but it's still there.
@Joe Villeneuve I have done my first project based off of your idea's and want to say thank you. I am not sure which post it was but it was some time last year where I saw you speaking of this process on a forum in BP, and I thought to myself "why not". I wasn't able to pull out all of my cash that I had put in but only having around 15k in a 195k appraised property I will take. I just wanted to give credit where credit was due for the idea, so thank you. And for those wondering yes it does work even in California :), It just costs a bit more up front and the cash flow is not as great, but it's still there.
Much appreciated, but the overall idea isn't new...I just added a number of different wrinkles, and put it on steroids. When something works well, there's no reason to re-invent the wheel...just change the tires when needed.
Why not use a portfolio lender? The local bank I use will lend as many properties as they feel comfortable with. My realtor has 23 mortgages with this bank (how I found them). I buy with hard money, rehab and then refi into a 20 year fixed note.
Why not use a portfolio lender? The local bank I use will lend as many properties as they feel comfortable with. My realtor has 23 mortgages with this bank (how I found them). I buy with hard money, rehab and then refi into a 20 year fixed note.
You're missing the subtle points. What you do works, it's not the same thing.
Fair enough. I guess I just didn't see the difference.
.............. 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.
Joe
Since you're paying off the lines of credit with a refi on the same property after 6 months, you essentially close the loc correct? Do you get any push back from the bankers who are doing the original LOC since you only have them open for such a limited time?
Thank you for the great info.
Fair enough. I guess I just didn't see the difference.
The use of a HML means you have to pay that back upon REFI. When I use cash, I pay myself back at REFI...and I use the same money again.
I don't need new funds to move forward. I get 100% of what I need funded at the start. I don't have to deal with the HML source's % of (ARV, purchase, purchase of rehab, etc...) that "shorts" me on what I need on the deal.
After you accumulate dozens of loans, let them marinate for a couple years on your tax returns... then refinance them all into a commercial pool loan, cross collateralizing the debt. If you get the right commercial lender they will let you pull out equity, new capital that will be tax free. This is a step to expanding your mind and business.
Frank
You just described part of the final "exit strategy" I use.
.............. 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.
Joe
Since you're paying off the lines of credit with a refi on the same property after 6 months, you essentially close the loc correct? Do you get any push back from the bankers who are doing the original LOC since you only have them open for such a limited time?
Thank you for the great info.
Yes, the LOCis closed out.
No pushback from the lender. In fact, the way I found this program was by looking for a source for the 6 month refi program. My LOC source asked me what I was looking for specifically. When I told them I was looking to get my cash out quickly so I could move forward with the next deal, they suggested this. When I told them I had a 6 month refi source that had better terms for carrying the loan, they said that's fine since there was only a one time $175 fee up front, and no pre-payment penalty.
They know exactly what I'm doing...and I have their full approval.
Yes, the LOCis closed out.
No pushback from the lender. In fact, the way I found this program was by looking for a source for the 6 month refi program. My LOC source asked me what I was looking for specifically. When I told them I was looking to get my cash out quickly so I could move forward with the next deal, they suggested this. When I told them I had a 6 month refi source that had better terms for carrying the loan, they said that's fine since there was only a one time $175 fee up front, and no pre-payment penalty.
They know exactly what I'm doing...and I have their full approval.
What kind of lender are you getting the LOC from? It is secured by each property after you complete the renovation correct? They're lending based solely on the appraised value at that point without regard to what you spent on the acquisition and rehab, correct?
My "exit strategy" is to own/control real estate without any of my personal capital.
Frank
My "exit strategy" is to own/control real estate without any of my personal capital.
Frank
That part is the same as mine. You're using HML to get in and refis to pay them off and recover the limited cash you put in.
I'm using all cash and getting it all back at refi. Similar, but the subtle difference is the entrance strategies...and the power all cash has. Keep in mind, I'm not spending any of my money since I get it all back at refi. I'm just using it over and over, and in the end, with the last refi, I get it all back...never having spent it.
Yes, the LOCis closed out.
No pushback from the lender. In fact, the way I found this program was by looking for a source for the 6 month refi program. My LOC source asked me what I was looking for specifically. When I told them I was looking to get my cash out quickly so I could move forward with the next deal, they suggested this. When I told them I had a 6 month refi source that had better terms for carrying the loan, they said that's fine since there was only a one time $175 fee up front, and no pre-payment penalty.
They know exactly what I'm doing...and I have their full approval.
What kind of lender are you getting the LOC from? It is secured by each property after you complete the renovation correct? They're lending based solely on the appraised value at that point without regard to what you spent on the acquisition and rehab, correct?
Lender is a regional mid-sized bank
Secured by the property after rehab...so it's based on ARV...not my cost going in.
Thank you for all the tips in this thread. I've moved away from private money and took on a partner for my next deal. Based on the comps, I should have about 70% of the ARV into the deal and hope to use this strategy a couple times before the end of the year.
Thanks all!
@Joe Villeneuve
Thanks Joe for the great read! Can you explain more about how the credit investor works after 10 properties?
@Joe Villeneuve
Thanks Joe for the great read! Can you explain more about how the credit investor works after 10 properties?
Contact me direct. It's easier to explain that way
@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
That basically is my plan however I may purchase duplex or up a quad for my first 10..
Sounds great to me! :)
are you factoring in refinancing costs into your "rehab costs"?
are you factoring in holding costs? (ex: taxes paid during rehab)?
are you factoring in refinancing costs into your "rehab costs"?
are you factoring in holding costs? (ex: taxes paid during rehab)?
Of course.
@Joe Villeneuve
Thanks Joe for the great read! Can you explain more about how the credit investor works after 10 properties?
There's more to it than this, but I also use a cash partner. The credit investor becomes the cash investor after they reach the maximum number of loans they will qualify for by selling parts of their interest in the properties they are the credit partner in. That was a really basic explanation for it. It's all in the details though.
How is the ARV determined ? Comps from a local realtor ? What steps do you take if the ARV is wrong after you've done the deal?
I'm reading this thread several months later as you see, but hope to revive the lively discussion in this thread @Joe VilleneuveI have the same question as @Account ClosedAs I'm trying to go through all the steps to implement this powerful strategy. I'm thinking of my last purchase which was a total rehab. I wonder how a lender would agree to give me a LOC based on the ARV and how that is determined? I think I comprehend every other step but this is an important one because it's right at the beginning.
Thanks for the education