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.
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 Closed didn't add my @name to his post so I never knew he asked that question.
ARV is usually determined by the most recent sales comps in the immediate area. The criteria may change based on each location, but the standard criteria for these comps are usually:
The lender then has his criteria for lending, but the loan amount is usually based on the following criteria:
I'm almost at the 6 month point of my last purchase. I did it with all cash, extensive rehab included, so my cash is tied up in there and once I refi this property I intend on using your method.
I didn't know I could get a line of credit on a just acquired property!
Thank you!
I'm almost at the 6 month point of my last purchase. I did it with all cash, extensive rehab included, so my cash is tied up in there and once I refi this property I intend on using your method.
I didn't know I could get a line of credit on a just acquired property!
Thank you!
Actually, my method isn't using LOC's...it's using REFIs.
Steps:
1 -Cash in
2 -Buy/Rehab
3 -Refinance Cash Out
4 -Use on next property
5 -repeat above steps
I'm almost at the 6 month point of my last purchase. I did it with all cash, extensive rehab included, so my cash is tied up in there and once I refi this property I intend on using your method.
I didn't know I could get a line of credit on a just acquired property!
Thank you!
Actually, my method isn't using LOC's...it's using REFIs.
Steps:
1 -Cash in
2 -Buy/Rehab
3 -Refinance Cash Out
4 -Use on next property
5 -repeat above steps
Oh!
The 5 steps above are what I used for my first two deals starting with a HELOC and some savings to buy property #1. Waited 6 months to refi, pay back the HELOC and then had cash for property #2 but as I said my cash is tied up because the purchase price was much lower than the ARV due ti needing a full rehab, so I thought I would try the technique you described before of getting a LOC immediately after purchase #3 to keep the money moving. I only have 2 purchases per year in my plan, but freeing up the seed capital quickly would enable me to buy the second property if it came along soon after the first for that year.
Originally posted by @Joe Villeneuve:
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
Hello Joe,
I have done this on a couple of projects where I have bought all cash, rehabbed , waited the 6 months and then refi'd. Going forward, I would like to get the cash out sooner than 6 months.
How does the equity loan Equity Loan achieve this? Is it because it creates a lien on the property and then by satisfying that lien, I am able to refi sooner? Can it be a HML that is opened and closed in an hour? Seems a little dodgy but brilliant if it works.
Tom Camarda
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
Hello Joe,
I have done this on a couple of projects where I have bought all cash, rehabbed , waited the 6 months and then refi'd. Going forward, I would like to get the cash out sooner than 6 months.
Does the Equity Loan achieve this? Is it because it creates a lien on the property and then by satisfying that lien, I am able to refi sooner? Can it be a HML that is opened and closed in an hour? Seems a little dodgy but brilliant if it works.
Tom Camarda
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
Hello Joe,
I have done this on a couple of projects where I have bought all cash, rehabbed , waited the 6 months and then refi'd. Going forward, I would like to get the cash out sooner than 6 months.
Q: Does the Equity Loan achieve this?
A: Yes...usually
Q: Can it be a HML that is opened and closed in an hour?
A: No...why would you do that?
Q: Does the Equity Loan achieve this?
A: Yes...usually
Q: Can it be a HML that is opened and closed in an hour?
A: No...why would you do that?
I guess a better question is how to avoid the 6 month seasoning?
TC
@Joe Villeneuve - Can you please refer me to the lenders you work with? The one who lends the Equity Loan right after the purchase and rehab, and the lender that you do the cash-refi after the seasoning period.
Thank you!
For those looking for my source for the above reference to a quick equity loan...unfortunately it no longer is an option. They pulled that "product" about 2 months ago. Lenders will do that when a product gets too popular to keep their lending portfolio balanced.
I always compare this to setting the odds in Vegas. When the betting is one sided, the odds change to attract the bets on the other side. The odds makers want the bets on both teams as equal as possible. This way the can't lose. Banks want their portfolios as equally balanced as possible. This way, a major change in the "connections" to one particular product they sell doesn't cause as big a problem to their overall business.