Delayed Financing vs Cash-out Refi

[Jessica Wainscott]

My husband and I just purchased our first SFH investment property and are planning to use it as a short term rental. We paid cash and are planning to get our money back out by financing it in order to purchase additional properties. I have been reading more about delayed financing as an option vs a cash-out refi. It looks like the cash out refi route will take much longer bc of a 6 month waiting time required.

Does anyone have experience with delayed financing after a cash purchase?  Thanks!

[Andrew Postell]

@Jessica Wainscott thanks for posting.  I want to make sure and clear up some things here if you don't mind.

"Delayed Financing" is a conventional loan term.  Meaning if you are using Fannie/Freddie to refinance your transaction then that term/rule would apply.  It is NOT the only loan type that you have as an option.

If you are using a Fannie/Freddie loan, that means you are getting a 30 year fixed rate loan (or at least have that as a choice).

With the "delayed financing" exception you have two options:

1. To receive your purchase price + closing costs back in your refinance loan...OR...
2. Receive 75% of the value of the property in your refinance loan...BUT

And here's the most important piece...whichever is the lower amount.

These rules are important to understand so here are two examples:

• Example 1: If you purchased a home with $50k of cash, and put $30k of renovations into the loan, and the home was worth $100k. 75% is $75k and $50k is your purchase price. So you could only receive $50k in your first 6 months of ownership since the LOWER amount is your purchase price. After 6 months you could receive the full 75% of the ARV.
• Example 2: If you purchased a home with $80k of cash, put $5k into the home, and the home was worth $100k. 75% would be $75k and your purchase price is $80k…so the lower amount is $75k.

When buying a home with cash you can absolutely get cash back right away but you will be limited to the lower of those two amounts.

So if you use Fannie/Freddie that's the rules.

If you use a commercial/portfolio loan...none of these rules apply.  There are plenty of commercial lenders that don't have any of these restrictions.  You can get cash out right away....but your rate will be higher...or maybe have a prepayment penalty...or maybe not be a 30 year loan...or some other feature that may not be as desirable.

There is a lot of confusion about this subject but feel free to ask anything additional.  I did write a pretty lengthy post on this topic that you can find HERE.  It does talk about a different technique as well but the first two sections would be good to review.

Feel free to ask anything additional and I'll get you squared away. Thanks!