Cash Out Refinance for Buy and Holds

Cash Out Refinance for Buy and Holds

Boardman, OH · Member since 2015 · 34 posts · 2 votes
Ok, I'm really hoping someone can help me here. I've read about how to execute a cash out refinance, and I've learn about this many, many times. Essentially, you purchase a property for less than 80% of it's appraised/speculated/compared value and then refinance to get your cash back out. However, the hang up here is that this type of deal is the financial unicorn of real estate. How does someone find these properties if they're not paying cash, paying a wholesaler, sending out 1000's of direct marketing letters at a 1% success rate, standing every morning in front of the courthouse for an auctioned house? I don't plan on spending all of my time doing this or buying 20 houses a year. It always seems like investors talk about these kinds of deals like this exist, but then in reality the forums are full of unsuccessful attempts because the bank will never accept the appraised value, only the purchased value when it's time to refinance and the seasoning period has passed. Is there any way to hedge against this happening? Do houses ever appear on the MLS at 80% of their estimated price, so I can actually utilize the knowledge and time of my realtor? I apologize for seeming so confused, but I've spent the last 3 years studying buy and hold real estate and when it finally comes time to invest, it seems improbable. Thanks in advance!!
0Reply
24 views

Most Popular Reply

Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
9y

This isn't a unicorn type of deal, it's done every day. I'm an idiot with an unimpressive amount of resources and even I can pull it off. examples:

last house, paid 45k + 23k rehab = 105k appraisal

house before that: 54k + 5k rehab = 115k appraisal

both bought off MLS.

all markets are different, so make sure not to get stuck where you live as how real estate is everywhere. I don't buy houses in Las Vegas even though I live here because the market isn't as lucrative as other places.

Talk to lenders and find what programs they use and their processes before you buy a home so you and the bank have your goals aligned and in sync. If your realtor isn't proficient in foreclosure homes, try to find one that is. The team you put together will determine much of your success.

Don't give up, it can be done it just takes some diligent action.

See this reply in the discussion

15 Replies

Jump to latestLatest
  • Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
    9y

    @Brandon Smeltzer The market has driven the number of sales that are not under 'fair condition" down, especially on the MLS. The most likely way to buy a property and pull your money out is to make improvements through the BRRRR Strategy. The key with this is find a property that is for sale for 80% of its ARV less repairs. For instance its ARV is $100k and it needs $15k in repairs (which is more than most owner occupants want and to small for a flipper) If you can get it for $65K [($100K*.8)-$15K]

    You need to force you own appreciation to make equity.

    Not to say that properties aren't listed for 80% of value, but they are rare and go quick.

  • Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
    9y

    This isn't a unicorn type of deal, it's done every day. I'm an idiot with an unimpressive amount of resources and even I can pull it off. examples:

    last house, paid 45k + 23k rehab = 105k appraisal

    house before that: 54k + 5k rehab = 115k appraisal

    both bought off MLS.

    all markets are different, so make sure not to get stuck where you live as how real estate is everywhere. I don't buy houses in Las Vegas even though I live here because the market isn't as lucrative as other places.

    Talk to lenders and find what programs they use and their processes before you buy a home so you and the bank have your goals aligned and in sync. If your realtor isn't proficient in foreclosure homes, try to find one that is. The team you put together will determine much of your success.

    Don't give up, it can be done it just takes some diligent action.

  • Boardman, OH · Member since 2015 · 34 posts · 2 votes
    9y
    Thanks Alexander Felice !! I appreciate the insight! The numbers you referenced on your last two deals seem like they could have an exit strategy of either a buy and hold cash out refi or a flip. It looks like I'll have to find a great realtor who really knows how to find these types of deals, including extensive familiarity in foreclosures. Thanks again!!
  • Boardman, OH · Member since 2015 · 34 posts · 2 votes
    9y
    Thanks Bill F. !! One of the problems in my area is that all the 3 bedroom 2 baths in the neighborhood haven't sold above 80k. Their are available 3,2's for around 65k that definitely could use 15k of work. I know I could theoretically force appreciation through basic value-add improvements, but I'm just scared that theirs a ceiling on those neighborhoods and if I take the gamble with 15k in rehab, that it will never appraise at 100k. Does this sound logical to you also?
  • Buy & Hold Investor · Chicago, IL · Member since 2014 · 10 posts · 5 votes
    9y

    @Brandon Smeltzer I would encourage you to find a deal where you find an opportunity to create value, making the refinancing scenario realistic. Purchasing a property for X and refinancing it for X+Y without doing anything, would be a red-flag in my opinion to an appraiser - unless there was a significant upward trend to support a higher appraised value. Here's a very simple example of how a buy/hold investor would utilize a refinance to not have any money out of pocket:

    Purchase price: $100,000

    Repairs/Improvements: $75,000

    ARV: $250,000

    Conventional Financing @ 75% ARV: $187,500 Loan

    At the time of refinancing the investor would actually recoup all of their money and be able to take out up to an additional $12,500 (depending if they want to max out the LTV on the loan or not). Buy investing an additional $75,000 to improve the property - they've generated $150,000 in perceived value.

    This works well if you have all cash to fund both the purchase and renovations -- However, if you're cash short -- there's always a way -- some banks offer purchase + renovation loans, you can use hard money / short term construction loans, and a variety of other creative ways discussed throughout BP.

    Thanks,

    Dan

  • Investor · Milwaukee, WI · Member since 2014 · 811 posts · 420 votes
    9y
    In addition, there are portfolio lenders who will allow you to refinance for the new appraised value right after rehab is completed
  • Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
    9y

    You need to look harder. You said "in your area". if you want to look for great deals, you may have to look beyond your city and maybe even state. Your other issue is "the bank". Theres a thousand banks and lenders in the US and they all operate differently. Some won't take 80% of ARV, some only take purchase+rehab, some need seasoning. you need to call around more.

    Here's my most recent deal Last Year

    Purchase (Oct 2016): 230k

    Rehab+Closing+Rehab: 150kish

    ARV(appraised Feb 2017): 680k

    After calling 15 lenders, got one to do a 66% LTV Cashout Refinance

    I just got my check yesterday for $200k (yay!)
    So originally with only 80k in cash I was able to create 230k in equity, have monthly gross rents of 8100/month and pulled an additional 200k out that I'm sinking into a couple more deals.

    you just have to look in the right places and call, call, call

  • Boardman, OH · Member since 2015 · 34 posts · 2 votes
    9y
    Phenomenal Dan C. Great info and example.
  • Boardman, OH · Member since 2015 · 34 posts · 2 votes
    9y
    David Zheng What type of neighborhood did you find a 230k property, get 8100 rent and force almost 400k in appreciation? Did you find this property off of the MLS? How long did you search for this "magical" property, haha?
  • Developer · Nashville, TN · Member since 2016 · 484 posts · 406 votes
    9y

    Many Turnkey companies can sell you properties like what you describe.  I agree with many of the posts here...

    1.  Look outside your own area.

    2.  Call multiple lenders...keep calling.  There are lenders that will do this.  

  • Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
    9y

    @Brandon Smeltzer That logic makes sense to me and its obvious you know your market. You need to listen to what the market is telling you. BRRR is one method of REI, but not the only one. Its that tool in a tool box metaphor. If BRRR doesn't work in your area at this time either change areas, wait until it works, or change methods. I'd rather have my money parked on the sideline loosing value due to inflation than shoehorn myself into a deal just because its the hot method on BP.

    For new methods, try getting into off market deals through direct mail or driving for dollars. 

    Maybe BRRR would work in another area by you, like @David Zheng suggested. 

    Its also not sacrilegious to wait until the market changes. Save up capital until you can deploy it in a manner that suites your goals. 

  • Investor · Oxford, MI · Member since 2016 · 110 posts · 41 votes
    9y
    You go to the river and watch for a fish - no fish. Three days pass and your convinced there is no fish. You nearly quit looking for fish. You go to the river and watch for fish - FISH! But your sphere is not ready... you were not ready doh. You go to the river looking for that fish but see only a tiny fish. You go to the river looking for a fish - FISH! Fumble stabbing the sphere to slowly - miss! So close to quitting but now that you have seen more than once your also salivating. Next day... You go to the river and see the fish coming further out and stab and get the FISH! Then as time goes on you chuckle hearing there are no Fish.
  • Investor · Gaithersburg, MD · Member since 2013 · 659 posts · 441 votes
    9y

    One thing to remember is that often times these deals take time to happen.  I've done at least 5 refinances on properties and pulled every penny I put into it out (and in a couple of cases more) and still had them cash flow well (or at least the same).

    If you have hopes of doing it 6 months after you purchase, it's a lot harder (but not impossible).  Often times those require buying low, rehabing, placing a tenant(s) and then refinancing.

    The times I did it was several years after purchase.  Increased rents and appreciation contributed to being able to do it and keep my cash flow the same.  Of course in EVERY situation I did it, that was not the "goal" at purchase.  The goal was to have a property that cash flowed.  I just considered the ability to do it a bonus that happened down the line.

    Over time, as your portfolio grows and appreciates, you'll do more and more of them.  

  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    9y

    @Brandon Smeltzer

    You have to find properties where you can build added value. That means a few things; Know your market really well so if you are using the MLS you can recognize whether something is a good deal or worth your time to look into it. Understand rehab cost and the time it takes to complete the project. My last two projects:

    Purchase 85,000 Rehab 15,000 rent 1275 commercial refi at 100,000 ARV 125,000 CF 450

    Purchase 95,000 Rehab 30,000 rent 1620 commercial refi at 130,000 ARV 163,000 CF 500

    Good Luck.

  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    9y

    @Brandon Smeltzer Using a combination of several strategies can help you achieve what you are looking for without spending all day looking for properties.  Here is an example of an investment property that we are finishing up right now.

    We found a property on a wholesale list for 69k in an area we are really familiar with.  We bought it with a hard money lender that we have worked with on several deals so he funds 100% of our purchases when they are under 150k.  We put 38k into the property for rehab.  We just got it leased with an option to buy. 

    Here are the numbers (we are finalizing them so I am giving close to accurate amounts):

    Purchase 69k

    Closing on the purchase 2k

    Hard money costs for 5 months 5.7k

    Rehab 38k 

    Holding Costs for 5 months from start to tenant and refinance 1.5k

    Total in 116,200.

    Appraised at 150,000

    Refinancing with a local bank next week at 75% ARV = 112,500

    5-year Option for property 6000

    Total 116,200 - 112,500 - 2300 (closing costs for refinance) - 6000 = 0 into the property.  

    Cash flow is $200 a month

    When option is exercised in 5-years total profit 62k split with partner.

    In this example we used the strategies of working with a wholesaler, hard money lender, the BRRR strategy, and Lease option. The total of our own money we put into the deal for 5 months was 45,200 which we are able to suck back out with the refinance.

Join the conversationCreate a free account to reply, vote on answers and follow this thread.