Purchase all cash, refi, repeat. Would that work?
Investor · Honolulu, HI · Member since 2016 · 362 posts · 93 votes
Aloha BP!
Exactly as my title states, if I were to purchase a property all cash, then wait for the seasoning period (if there is any), and purchase the next property, are there any setbacks to this? There are a few things I would need to account for such as refinance costs, making sure the property still cash flows, the amount of the refi LTV and if that's enough for the next property. Are there any other downfalls to this strategy? Is this strategy used commonly or am I just heading in the wrong direction? Thanks in advance. ALOHA!
just to clarify since I don't think any one has truly answered the question above. Using the BRRRR strategy on TK is very unlikely and somewhat silly. If you buy a tk, you will not have enough equity in the property withdraw funds. The TK provider wouldn't leave that much meat on the bone. Second, why would you use cash on a TK if you intend to refi in 6 months. Just get a loan up front. Why would you want to pay closing costs twice?
Also, 6 month seasoning is a very common practice on the residential side. Many banks will require 12 months! If you refi through a commercial lender, most will not care about a seasoning period.
My initial question was asked with the assumption that there would be some meat left in the deal from a turnkey provider. Thanks for clearing this up everybody.
So.... what if you pay cash from your own funds rather than using a hard money lender? Let's say you have enough cash to do that (once) but you want to be able extract some of that cash to use on a future property, too. So you use your own cash to secure the deal quickly and beat out the competition, followed by the rehab, rental, and finance (or rehab, finance then rental BRRFR or BRFRR?). No doubt there are holes in this idea like swiss cheese. You still need to go through 2 closings this way, but you avoid the costs of hard-money lenders?
Have at it...
Aloha BP!
Exactly as my title states, if I were to purchase a property all cash, then wait for the seasoning period (if there is any), and purchase the next property, are there any setbacks to this? There are a few things I would need to account for such as refinance costs, making sure the property still cash flows, the amount of the refi LTV and if that's enough for the next property. Are there any other downfalls to this strategy? Is this strategy used commonly or am I just heading in the wrong direction? Thanks in advance. ALOHA!
Several things can go wrong (but which strategy is without risks - even wholesaling has risks). Instead of listing what can go wrong, it will be good to ask the following questions per every stage of the BRRRR process: @Brandon Turner might think of other questions to ask or what the risks are in each step.
B - Buy
1. Are you buying at the right price?
2. Have you estimated the repair cost accurately?
3. (if you're using financing) Have you lined up a good hard money lender? What are the terms? Is the HML legit?
4. Title have been checked?
5. Has the property professionally inspected? (strongly suggest you do this on your first deal)
R - rehab
1. Have you lined up 3 good GCs to give you bids on a Scope of Work you developed?
2. Have you vetted out the GC you decide to choose (are they licensed, bonded and insured)?
3. What about permits? Do you know of village/ city inspection requirements? Timelines?
R - rent
Here you have the typical risks of having a rental property - the most important consideration is tenant screening. Another consideration is property management.
R - refinance
1. Have you lined up the lender who will do the Refi?
2. What's the lender's seasoning requirements if any?
3. How much LTV can you refi?
4. Do you have the right debt to income to do the refi?
5. What are the terms of the loan? Will the property still cashflows?
R - repeat
1. How many loans have you done? Are you approaching the 10 loan-limit? if so...
2. Do you have a portfolio lender?
@Wendell De Guzman I really appreciate the advice and will be referring back to it in the future.
@Wendell De Guzman I really appreciate the advice and will be referring back to it in the future.
You're very welcome. BP is such an awesome community isn't it?
BRRRR does work.
That's what we do in our real estate business but instead of just renting the house, we do rent to own.
@Patricia Miller we are doing the same thing as you!! I don't think it's swiss cheese :) but I'm learning a lot about the whole process of getting money back out! Good luck to you!
marna
@Kerry Baird and @Brent Coombs i'm curious on your thoughts on why the cash-out refi does not include rehab costs and maybe how to find a bank that will lump rehab in to avoid this? The Fannie/Freddie regs literally state that the delayed finance exception works to refi your "initial investment" in the property but they do not define "initial investment," leaving the term up for debate. Thus, you could have some banks including rehab and some excluding--depending on their idea of what "initial investment" includes. Is this an overlay I'm overlooking? lol. I have seen an example here on BP of an investor who got his full acquisition (purchase, rehab, and closing) back on refi and he purchased all his own cash.
@Shekeira Ward, if 70% of its immediate appraisal still covers your cash purchase, you could of course then use the "delayed financing" loan to fund the rehab. Otherwise, why not just keep enough of your cash for the rehab and take out a normal loan for the initial purchase remainder?
An FHA203(k) Loan will lend for purchase AND rehab, but I believe that's only if owner occupying. Others may chime in if something similar is available for pure investments. Cheers...
I am simply cutting and pasting from the sites linked to below to answer some of these great questions. I've had to dig into this topic, as I am currently in the middle a cash-out refi on 4 properties. Three are longer term buy-and-hold properties, which we picked up in 2012-2013. Debt pay-down and market appreciation have resulted in equity. Number 4 is a house that we inherited a few months ago, as in the "grandma" question on page 1 of this thread. There is no waiting period to refinance an inherited house, according to Fannie Mae (link directly below). Requirements seems to change weekly! Hence, much confusion. My words end here; everything below is copied from the experts:
Properties listed for sale in the six months preceding the disbursement date of the new mortgage loan are limited to 70% LTV.
The property must have been purchased (or acquired) by the borrower at least six months prior to the disbursement date of the new mortgage loan except for the following:
ACCEPTABLE USES:
The following are acceptable uses for cash-out refinance transactions:
And now, today, cash buyers can re-access their purchase funds just one day after closing.
"Cash out" refinances are available to buyers with no mortgage.
Via a special Fannie Mae program known as Delayed Financing, U.S. home buyers and real estate investors are no longer required to wait 6 months post-closing to refinance a home bought with cash. You can now refinance your home within 24 hours of its purchase, and still get access to today's great rates.
A mortgage refinance is the literal re-financing of a mortgage. As in, there's an existing mortgage in place for your home, and you opt to replace that mortgage with a newer one.
Refinance mortgage loans are similar to purchase mortgage loans, except that fewer people are involved, paperwork requirements are less, and costs can be reduced.
You already own your home, after all, so there's no need to convey real property; or to sign and review purchase contracts between multiple parties.
There's also less work required for the title search and settlement services; and, the taxes collected during the home purchase process don't apply when doing a refi.
Refinancing your home is a "paper-pushing" process -- your old loan is paid off, your new loan gets started.
Many refinances will close in 30 days or fewer.
In general, a refinance loan belongs to one of three categorizations :
A rate-and-term refinance is a refinance where the interest rate is changing; or the term of the loan (i.e. its length in years) is changing; or, both.
Usually, rate-and-term refinances are used to reduce your home's mortgage rate, but they're also used to convert home loans from 30-year mortgages to 15-year loans, for example.
Homeowners switching to a 15-year mortgage from a 30-year save approximately 60% on mortgage interest paid over the life of the loan.
"Streamline refinance" is a generic term for a refi which requires less documentation than a typical home loan refinance. Because of this feature, streamline refinances are sometimes called "low-doc" loans.
@Chris Mason can likely give input on this topic..
@Kerry Baird is the delayed financing option available amongst all lenders or only certain ones?
@Kerry Baird is the delayed financing option available amongst all lenders or only certain ones?
It's a basic/standard Fannie Mae guideline.
Each individual lending institution, however, is allowed to be more restrictive than that if they wish.
Good stuff! Thanks all! @Brent Coombs @Kerry Baird @Mike Creswell