Lessons from refi after all cash purchase?

Question

Hi BP community. What are your thoughts about doing a cash out refinance after making an all cash offer? Has anyone tried this? All cash offers would certainly increase leverage during the purchase process, but wondering if anyone has insights or lessons to share about this topic. Some loan officers have warned against higher one time fees from cash out refinance compared to conventional fixed mortgages. Curious what we think about this.

Qiong L. · Answer

@Gabe Tao @Farrukh Amini  Wanted to share some additional details I just learned about repercussions of this approach. One lender I spoke to stated that there's about a .625% cost difference between doing a refinance after an all cash purchase vs. conventional loan. For example on a cash out refinance, if the loan amount is $100K, it would cost $625 more to do a cash out refinance than it would to purchase the home.

LTV is also slightly different depending on property type as well. For example, a two-family investment property can only go up to 70% LTV as opposed to 75% for a single family.

Hope this information helps.

Shiloh Lundahl · Answer

@Jason Norton are any of the lenders you work with based in Arizona?

Qiong L. · Answer

@Jason Norton Good to know, thanks!

Jason Norton · Answer

@Qiong L.

Yes ma’am I actually have lenders that will go up to 80% LTV. I’m just mentioning that some lenders because you purchased the house within their seasoning. They only are willing to do a certain amount of leverage for the purchase and may be rehab you stack up all expenses they’ll do a certain percentage of that. But I have lenders that you could finish your rehab yesterday and we can go ahead and start the 30 year amortization process now.

I’ve heard from so many people in the past seven years that I’ve been doing commercial lending, say that seasoning for commercial lenders is too long. We have 30 lenders at our disposal and I have spent years finding lenders they don’t really worry about seasoning too much. They just want to know you’ve done with the property what you’re looking to do and now how can we assist you put this into a 30 year amortization schedule so you can keep the most equity in the property in case you need to sell it and also at the same you’re also receiving the max monthly cash flow that you can get from your property. I have specifically hand-picked and these hand-picked these lenders to ensure that the client gets the best deal that can be offered. But remember we are not traditional bank financing. But our leverage is an interest rates we get sometimes five applications a day and we have over 40 branch managers nationwide.￼￼￼

Qiong L. · Answer

@Ken Naim These are great considerations. For a BRRR, the cash out refi method would certainly be a powerful option, especially if the initial purchase price is relatively affordable.

@Gabe Tao Good to know. Thanks!

@Jason Norton Thanks for the input. You mentioned that companies want to do 70% of actual cash that purchaser paid. My impression is that lenders are assessing loan amount based on the appraised value of the property, not necessarily the cash you paid out. Do you have a different experience?

Jason Norton · Answer

@Qiong L.

We do this for clients all the time so go ahead and pay cash for the property and then come to us to get in some instances up to 80% LTV. Most companies want to do 70% of the actual cash that you paid out but some companies because you bought it right they’ll go ahead and give you up to a certain leverage point of LTV. We have 30 Lender’s to choose from so having that many lenders you should be able to find a leverage that works for you.

Gabe T. · Answer

@Qiong L.

Interesting.  I also had the loan agent at Wells Fargo run the numbers.  Here’s what he told me.  For a 430k investment property, to borrow $260 - 60%, with 770 credit score:

Delayed financing within 60 days - 3.625%

Refi only after 6 months - 4%

Refi cashout after 6 months - 4.5%

I’m also discovering this after the fact, that they won’t include gift money in the loan, unless it’s seasoned 6 months.  So even with gift letters, the bank will only loan what I contributed myself.

Ken Naim · Answer

@Qiong The point of the cash out refi is to pull your initial investment out after the 6 month seasoning and value add. Yes it is more expensive, yes the LTV are lower but the point is the value is higher. If you bought something for 100k cash and rehab for 40k and the appraised value is 200k, a 70% ltv cashout refi will net you 140k, so your investment is 0.

With 20% down you'll be in for 60k (20k down payment plus 40k rehab). If you want to take out your investment you still have to do a cashout refi and you rnd up at the same place ratewise but with higher initial costs for the original mortgage, with a lower cash outlay of course.

As with everything it depends on your plan. If you are planning on only buying one then a conventional first os cheaper. If you are planning on building a portfolio either will work, just have to run the numbets through your scenarios.

Farrukh Amini · Answer

Good to know. Thank you for the update.

Qiong L. · Answer

@Gabe Tao Congratulations on your deal! I didn't know about the 6 month window loan initiation. Thanks for sharing that.