Delayed financing question

32 Replies

Hello BP, doing some research on delayed financing when purchasing with cash and cashing out some money under 6 months. Are investors doing this and then cashing out the remainder after 6 months? Doesn't that cost more money closing 3 times? How do they get the rehab money back? Not sure i see the point yet or how to properly use it? Thanks! Ryan

@Ryan Keenan

If you are referring to the BRRRR strategy it's 2 closings; purchase and refi. Purchase, rehab, cost of money, property taxes, insurance, utilities all need to ne included in your estimate.

Remember with this strategy you are forcing appreciation with the rehab.  Buying distressed properties at a discount and rehabing them cost effectively is critical.

Same as a flip you must understand the ARV. An appraisal will be part of the refinance so our value must be accurate. Need enough for 75-80% of LTV and enough to cash out our refi.

I recently had a purchase of 100K, put in 15,000.  Paid my investor back and cashed out the rehab money.  In this case I had 1K stuck in.  I will have all of money back out in 3 months.  

I think that’s a total win.  Investor is happy, I’m happy getting all my money back, tenant has a nice place to live and my investor will invest with me again.  

Good Luck 

Originally posted by @Kenneth Garrett :

@Ryan Keenan

If you are referring to the BRRRR strategy it's 2 closings; purchase and refi. Purchase, rehab, cost of money, property taxes, insurance, utilities all need to ne included in your estimate.

Remember with this strategy you are forcing appreciation with the rehab.  Buying distressed properties at a discount and rehabing them cost effectively is critical.

Same as a flip you must understand the ARV. An appraisal will be part of the refinance so our value must be accurate. Need enough for 75-80% of LTV and enough to cash out our refi.

I recently had a purchase of 100K, put in 15,000.  Paid my investor back and cashed out the rehab money.  In this case I had 1K stuck in.  I will have all of money back out in 3 months.  

I think that’s a total win.  Investor is happy, I’m happy getting all my money back, tenant has a nice place to live and my investor will invest with me again.  

Good Luck 

 Thanks for the response, did you have to wait 6 months to refinance?

Originally posted by @Kenneth Garrett :

@Ryan Keenan

I use commercial loans no seasoning is required.

Do you recommend i use my conventional loan options first or go right to commercial?

Thanks! 

@Ryan Keenan The commercial loan route will always be the path of least resistance and quicker when cash out refinancing, but that will come at a cost typically. Higher rates, different terms, probably higher closing costs than conventional. You can also get the loan in a LLC which you can't do with conventional. Not sure if that is a big deal for you or not.

With conventional cash out refinancing you will get a better rate, probably less closing costs, but there will be more hoops to jump through to get the loan and typically more of a seasoning requirement. You will also have to own in your perosnal name.

To me the choice comes down to how fast do you need to move your money in and out of the project to hit your goals. If you are trying to accumulate properties at a good pace than I would seriously consider commercial.

@Ryan Keenan  

I agree with @Michael Noto

a residential loan has more favorable terms. If you are trying to go around the seasoning aspect then you will need a LLC for a commercial Loan.

Commercial loans are typically 5 year balloon, amortized over 20-25 years, interest rate around 6%.  The advantage is the qualification is based on the property not so much on you.  If aunt sally gave you $20 for Christmas and you deposited it in the bank they are not asking you for proof or an explanation.

Originally posted by @Kenneth Garrett :

@Ryan Keenan 

I agree with @Michael Noto

a residential loan has more favorable terms. If you are trying to go around the seasoning aspect then you will need a LLC for a commercial Loan.

Commercial loans are typically 5 year balloon, amortized over 20-25 years, interest rate around 6%.  The advantage is the qualification is based on the property not so much on you.  If aunt sally gave you $20 for Christmas and you deposited it in the bank they are not asking you for proof or an explanation.

 Great information! How difficult is it refinancing after 5 years? Can you often use the same lender?

@Ryan Keenan Typically the loan rates just reset after the 5-years and at that point you can either go with the reset interest rate for another 5-year term or refi out of the loan completely if you can do better elsewhere.

Originally posted by @Ryan Keenan :
Originally posted by @Kenneth Garrett:

@Ryan Keenan

I use commercial loans no seasoning is required.

Do you recommend i use my conventional loan options first or go right to commercial?

Thanks! 

We always recommend you take a little time and use as many conventional loans as you can because commercial loans are more expensive than conventional loans.  Having said that, if you don't qualify for conventional loans for one reason or another (and there are many) then commercial is a great way to go and continue investing.

Stephanie

@Ryan Keenan you can tie your Reno budget into the initial purchase. It will go into escrow and draws can be set to have the escrow company release to the contractor. The delayed financing rule allows you to refi 100% of the HUD plus closing costs. That is how you can get your Reno costs back without seasoning. Basically in the HUD, put in your Reno plus purchase price. Please note that I am not an attorney,tax professional, or other. Please do your own research to verify the accuracy of this post. Hope this is helpful.
Originally posted by @Samuel Glantz :
@Ryan Keenan you can tie your Reno budget into the initial purchase. It will go into escrow and draws can be set to have the escrow company release to the contractor. The delayed financing rule allows you to refi 100% of the HUD plus closing costs. That is how you can get your Reno costs back without seasoning. Basically in the HUD, put in your Reno plus purchase price. Please note that I am not an attorney,tax professional, or other. Please do your own research to verify the accuracy of this post. Hope this is helpful.

Thanks for you response! Stupid question what's HUD stand for?

If I buy a house cash let's say 50k and put a additional 30k of my own money in a escrow account for the rehab when I'm purchasing the property , I can withdraw 100% of my money? Will the loan be a conventional fixed rate?

Originally posted by @Michael Noto :

@Ryan Keenan Typically the loan rates just reset after the 5-years and at that point you can either go with the reset interest rate for another 5-year term or refi out of the loan completely if you can do better elsewhere.

 The loan resets to what the current interest rate is? So it could be 5% now but in 5 years it could go to 6 or 7?

@Ryan Keenan you may want to go back and listen to BP Podcast Show 301 with @Alexander Felice  

In it, Alex talks about how he interprets Fannie Mae delayed financing guidelines to 'bake' rehab costs into the final closing statement at initial purchase to allow for a cash-out refinance in less time than is typically required for seasoning. 

A caveat here though: you are limited to only extracting out up to what is on the closing statement so any additional equity value created is locked until minimum seasoning requirements are met and subject to Lender approval and guidelines. 

Originally posted by @Larry Hawkins:

@Ryan Keenan you may want to go back and listen to BP Podcast Show 301 with @Alexander Felice  

In it, Alex talks about how he interprets Fannie Mae delayed financing guidelines to 'bake' rehab costs into the final closing statement at initial purchase to allow for a cash-out refinance in less time than is typically required for seasoning. 

A caveat here though: you are limited to only extracting out up to what is on the closing statement so any additional equity value created is locked until minimum seasoning requirements are met and subject to Lender approval and guidelines. 

 How many time can you do this strategy?

Thanks!

@Ryan Keenan well it all depends. Most lenders underwrite to Fannie Mae guidelines; however, not all lenders sell their loans in the secondary market. If you have a lender that holds their loans in-house, in their portfolio, then they will probably let you do it as many times as you can. If your loans will be held by Fannie Mae, then each individual are allowed up to 10 loans. 

but even still, in the great scheme of things, this should not be a barrier because you can BRRRR through a few properties and then simply roll them into a single commercial portfolio loan with a local credit union or bank and keep on going if it came down to it.

Originally posted by @Larry Hawkins:

@Ryan Keenan well it all depends. Most lenders underwrite to Fannie Mae guidelines; however, not all lenders sell their loans in the secondary market. If you have a lender that holds their loans in-house, in their portfolio, then they will probably let you do it as many times as you can. If your loans will be held by Fannie Mae, then each individual are allowed up to 10 loans. 

but even still, in the great scheme of things, this should not be a barrier because you can BRRRR through a few properties and then simply roll them into a single commercial portfolio loan with a local credit union or bank and keep on going if it came down to it.

 Thanks for the info!

@Kenneth Garrett Great info!! Question, if I purchase a rehab with intentions of long Term rentals and hold. Let’s say I use my own money or private money for all rehab and closing costs. When I contact a bank for refinancing options would they usually take the ARV/current rehab appraisal value? When I rehab and refinance the property, will the bank require me to keep some of my own money in the deal or will they re-finance the entire amount and cash out assuming the total cost is less than the set LTV finance parameters? Basically will the bank give me a cash out or force me to keep some money in the deal. I actually don’t mind keeping some money in the deal to keep cost down and cash flow up. What is the usual refinance LTV one should strive for? Thanks guys!!!

@Alex Palma

Typically you can cash out provided you meet the LTV. I'm usually at 75%. A 100K project would leave 75K in. If your total purchase and rehab were 70K you could cash out 5K. Each bank is different. I use commercial loans and have never had a problem. Residential loans are more restrictive. You will want to check with your lender. Seasoning may impact the answer.

Good Luck. 

@Kenneth Garrett Thanks for the response. Should i just “knock” on the door of all my local banks? Or are there any banks you recommend. Thanks

@Alex Palma

I would contact local small banks in your area.  The small local banks are easier to work with.

Originally posted by @Kenneth Garrett :

@Alex Palma

Typically you can cash out provided you meet the LTV. I'm usually at 75%. A 100K project would leave 75K in. If your total purchase and rehab were 70K you could cash out 5K. Each bank is different. I use commercial loans and have never had a problem. Residential loans are more restrictive. You will want to check with your lender. Seasoning may impact the answer.

Good Luck. 

 Is this based on buying and rehabbing all cash? Only 5k out? I'm missing something 

@Ryan Keenan

It’s based on cash.   I typically use cash for purchase and rehab.  you would need to check with the refi lender.  I think with residential they might question it, but you’ll need to check.

The only way you are getting cash back is if the aporaisal is valued high enough based on the LTV of 75% or 80% depending on the lender requirements. Then calculate the money you have in and see if there is enough value. Let's use a different calculation.

Purchase                    100K                               Rehab cost cash.         20K              Total investment.      120K

Aporaisal 200K 75% LTV 150K. Minus investment 120K. Cash back to you. 30K

Hope this helps.

                                   

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