Cash out refinance success

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Cash out refinance success

William Allen
Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes

I wanted to post the story of a rental house that we purchased a few months ago and just got done with a cash out refinance.  The numbers are great and I think they will give some of you the motivation needed to pull the trigger on a similar property.  

House is a 4/3 in a gated community. It was a HUD foreclosure and the previous model home in a community that is still building new construction homes. The area is dominated by military, health care, and some executive rentals.

The purchase price was $185k and we put just under $5k into the home for closing costs and light renovations (paint, cleaning, gutters, fridge).  Cash purchase all in at $190k.  

We rented the house out immediately on a long term lease at $1775/month with the tenant responsible for all utilities and lawn maintenance.   So, this house was just under the 1% rule which is what I shoot for in my upscale rental properties.  However, the rent will increase 3% per year so we will get there in about 2 years.  

I contacted my online lender after 2 months of purchase and got the cash out process going, the house appraised at $265k and at 70% LTV I was able to pull out $185,500 on my cash out with no origination fee, 4.5% APR, 30 year am, and $1k lender credit at closing.

So, we now have about $5,500 into the house (due to closing costs) and it is cash flowing at just over $300/month once maintenance, capex and vacancies are included.  I currently self manage our properties but that would drop the cash flow in the future when they all get passed over to PM.

I did need the upfront cash and had to find the deal but for a little bit out of pocket we were able to add a great cash flowing property to our inventory.  And, the day after closing we bought another one with the cash!  

The deals are out there, anyone else have a similar story?

MODERATOR:  NO REQUESTS FOR LENDERS IN THIS THREAD, PLEASE.  SUCH REQUESTS MUST BE POSTED ONLY IN THE MARKETPLACE.

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Gino BarbaroPro Member
Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
10y

@William Allen@Jake Stenziano

Hi William

Great deal.  My partners and I have had success with all of our purchases the past two years.  Our business plan is to buy underperforming multis from burned out motivated sellers.  Our first purchase was a 25 unit property.  We purchased a 136 unit for 4.075 million in feb 2014 that was grossing 50,000 per month with about 30 vacancies.  In 12 months we were able to increase revenue to 85,000 per month through rent increases, fees just by taking care of deferred maintenance and offering great customer service

We went to the bank in December 2014 and tried to refi.  They could not believe the performance of the property and came in with a 5.7 million appraisal which we new was too low.  We struggled for 8 more months until a local bank came in with a 6.5 million dollar appraisal, and we cashed out 1. 6 million dollars 

My mentor told me the way to wealth is to go as big as possible and I did not believe him until this deal.  In business the more peopl you serve the wealthier you will become and it is true in renting to tenants

We are in the process of refinancing our smaller properties, but this would not have been possible if we did not buy right 

Good luck

Gino

Podcast Guest on Show The “Conveyor Belt” System That’ll Build You a BIG Rental Portfolio Quickly
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  • Janene Tompkins
    Investor · Durham, NC · Member since 2013 · 62 posts · 40 votes
    10y

    Congratulations! What a great success story.

    What type of loan product did you use? A traditional mortgage or a commercial loan?

    Thanks,

    Janene

    1Reply
  • William Allen
    OP
    Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes
    10y

    @Stephanie L.

    I suspect that BOA is using the same Fannie Mae guidelines that I posted previously. So, depending on the type of property, loan type, and number of loans an investor has, the LTV will go by those guidelines. SFR homes with less than 4 financed properties have a max LTV of 75% and with more than 4 financed properties a max of 70%, assuming a Fixed Rate Mortgage. These will go down with a variable or MFR property. I also suggest that if the originator you are using doesn't know about the delayed financing exemption you take the time to educate them and show them the documents I posted earlier in this thread. I am going through that right now with a local lender I am building a relationship with because they told me I would have to season the property for 6 months or more. It's not necessarily the big banks or small banks that will affect that, it is the lending requirements they are following, ie. are they keeping the loan in house or following Fannie Mae guidelines.

    @Janene Tompkins

    I shopped commercial loans but when I learned I could still do a conventional Fannie Mae based loan I jumped on it.  The rates and terms couldn't be beat and the biggest thing was the length of amortization which is key for a rental property.

    0Reply
  • Laura B.
    Real Estate Agent · W Hartford, CT · Member since 2015 · 9 posts · 0 votes
    10y

    I tried to refinance a buy and hold that I purchased not quite 2 years ago and was told that I could only get 50% LTV if I didn't have it for 2 years yet. What is the delayed financing exemption everyone is talking about?

    0Reply
  • Nick Foundas
    Natick, MA · Member since 2013 · 86 posts · 47 votes
    10y

    Hello, I just want to make sure I understand how the Cash Out Refi works since I have not done one before. If the house was purchased for $185k and then appraised for $265k, 70% LTV equals $185,500. So in order to determine how much cash you walk away with at the closing table dont you have to subtract the loan balance from $185,500? So wouldnt that mean there is only $500 cash back at closing if the original loan was $185k? Sorry just hoping to understand how the process works. Thanks!

    0Reply
  • Jason Zullo
    Owner Landscape Construction Co · Brentwood, NY · Member since 2015 · 37 posts · 11 votes
    10y
    Originally posted by @Nick Foundas:

    Hello, I just want to make sure I understand how the Cash Out Refi works since I have not done one before. If the house was purchased for $185k and then appraised for $265k, 70% LTV equals $185,500. So in order to determine how much cash you walk away with at the closing table dont you have to subtract the loan balance from $185,500? So wouldnt that mean there is only $500 cash back at closing if the original loan was $185k? Sorry just hoping to understand how the process works. Thanks!

     He paid cash for the home in the first place so he used the refi to get his cash out and buy another house and he will probably do the same with the newer one and keep his money working for him and his tenants paying for the properties. 

    1Reply
  • Chris Virgil-Stone
    Rental Property Investor · Cape Coral, FL · Member since 2015 · 206 posts · 83 votes
    10y

    Congratulations! That is an awesome deal. I hope to capitalize on similar opportunities. Until a few months back I didn't realize the power of refinancing for cash out.

    1Reply
  • Andy Basler
    Investor · Knoxville, TN · Member since 2015 · 24 posts · 9 votes
    10y
    Originally posted by @William Allen:

    @Account Closed

    Take a look at these links, they will have the answers you are looking for. The delayed financing exemption will allow you to do a cash out refinance before the home has seasoned for 6 months. There are matrices on here as well that show the max LTV and min credit score needed depending on what kind of property and type of loan.

    https://www.fanniemae.com/content/guide/selling/b2...

    https://www.fanniemae.com/content/guide/selling/b2...

    https://www.fanniemae.com/content/eligibility_info...

    Ok....learing everyday.....I was told with my investment properties I always had to go commerical loans....and not fannie loans.  Sounds like I was told incorrectly.  Comments/help?!

    thanks

    0Reply
  • Matt Kvalheim
    Accountant · Tustin, CA · Member since 2013 · 65 posts · 10 votes
    10y

    Good for you William!  Thanks for sharing!

    I have a question, I am doing something similar on a property in KC.  I purchased it for cash from Homepath and it needed a lot of work.  But after the repairs are done, it now appraises at about 30% above what I paid for it.  However, in order for my bank to use the new appraised value for the cash out refinance, they want me to wait 12 months from the original purchase date.  If I try to refinance any time before that, they say they can only use the original purchase price as the basis for the appraised value.

    How did you get around that and refinance at a higher appraised value so quickly?  Do I simply need to try a different bank (I called 3 and they all had the same rule)?

    1Reply
  • DeVon Zumbrennen
    Investor, Property Manager, Realtor · Orem, UT · Member since 2015 · 10 posts · 2 votes
    10y

    @William Allen

    Thanks for the post. And thanks for links; very useful to us at this time. We are in the middle of buying a REO property via Auction.com with cash. We were hoping to change from cash to financing due to the 45 days for closing, but the selling bank, WF, is being difficult to work with . . . typical of them. So, We're putting it on the HELOC. I hope the information on these links will help us approach our lender and get a loan in place sooner.

    1Reply
  • Jonathan Bonck
    Investor · Houston, TX · Member since 2015 · 57 posts · 21 votes
    10y

    @William Allen 

    I apologize if I missed it in your original post. But I don't see the Online Lenders interest rate or their ROI for giving you $185K to purchase the house? Did you give them a long term share of the cash flow, equity, or depreciation? I know they would just give you $185K and a month later you give it right back with nothing for them.

    Thanks! 

    0Reply
  • William Allen
    OP
    Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes
    10y
    Originally posted by @Laura B.:

    I tried to refinance a buy and hold that I purchased not quite 2 years ago and was told that I could only get 50% LTV if I didn't have it for 2 years yet. What is the delayed financing exemption everyone is talking about?

    Hey Laura, if you look back on the links I posted on the first page of this thread it will give you some requirements that Fannie Mae sets depending on a lot of variables including that exemption. Since you bought it over 6 months ago you won't qualify for the delayed financing exemption but since it has seasoned you should be able to get well over 50%. In my case, I have been a landlord for about 6 years with tax returns to prove income. So, it is usually easier for me to have a loan officer account for my rental income or the projected rental income of my new acquisition since I have shown history as a successful landlord. A lot of times it is the DTI ratio that is giving people trouble when it comes to buying investment properties or refinancing. I suggest you talk to a couple loan originators to see what everyone will offer you. Good luck.

    0Reply
  • William Allen
    OP
    Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes
    10y

    You were told incorrect, you could finance an investment property immediately with 20-25% down using a traditional loan product within the Fannie Mae guidelines, you could use a local portfolio lender that will keep your loan in house, or you could go to a commercial lender. And these aren't your only possibilities, you could also get someone to finance your property using their self directed IRA or 401k and hold the note or owner finance the property. The possibilities are really endless and that is what I love about real estate investing and the power of other peoples money and leverage.

    0Reply
  • William Allen
    OP
    Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes
    10y
    Originally posted by @Matt Kvalheim:

    Good for you William!  Thanks for sharing!

    I have a question, I am doing something similar on a property in KC.  I purchased it for cash from Homepath and it needed a lot of work.  But after the repairs are done, it now appraises at about 30% above what I paid for it.  However, in order for my bank to use the new appraised value for the cash out refinance, they want me to wait 12 months from the original purchase date.  If I try to refinance any time before that, they say they can only use the original purchase price as the basis for the appraised value.

    How did you get around that and refinance at a higher appraised value so quickly?  Do I simply need to try a different bank (I called 3 and they all had the same rule)?

    Matt, Homepath can be a pain because when you buy it they won't let you sell it or refinance it in the next 3 months for more than 20% of what you bought it for.  After that, free game.  Could that be the problem you are running into?  I'm assuming you didn't get it appraised when you bought it since you paid cash, is that right?  I would suggest going to a national lender instead of a big brick and mortar bank to attempt a cash out refinance.  Their local policy may be the problem you are running into as I am not familiar with that limitation but I am also not a loan originator, just another investor.  Is it possible they are saying they can only cash you out up to the original purchase price?  My recommendation is simple, educate your loan originator with the fannie mae guidelines I posted before and get your cash out in the next 30 days.  

    0Reply
  • Dan Hatch
    Investor · Milton, FL · Member since 2015 · 44 posts · 16 votes
    10y
    Great job! I just did a like kind but smaller deal a few months ago ($45k) and am currently refi ing a $60k with total investment of $43k . The best part is, you still keep the property! It's like getting it for free or getting paid to keep it 😁
    2Reply
  • Matt Dorsten
    Commercial Real Estate Broker · Denver, CO · Member since 2015 · 38 posts · 8 votes
    10y

    @William Allen, congrats on your success!  What did you think of the $265K appraisal?  Was it what you expected, or lower, or higher?  Was that your one and only appraisal?

    0Reply
  • William Allen
    OP
    Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes
    10y

    The commercial lenders I approached for this deal were pushing a LOC as well but I wasn't interested. I knew that I wanted all my cash back out of it and put it on long term financing since I was going to repeat this process a few more times. In fact, like I said in my original post, I bought another house the next day. I would have been able to do that with a LOC but I wouldn't have been able to do it again after that. It will all depend on what you want to do with the cash NEXT that will determine whether to put a LOC on the house or do a cash out refinance. So, plan for that ahead of time...

    0Reply
  • William Allen
    OP
    Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes
    10y
    Originally posted by @Matt Dorsten:

    @William Allen, congrats on your success!  What did you think of the $265K appraisal?  Was it what you expected, or lower, or higher?  Was that your one and only appraisal?

    Matt, great question. Initially I was working with a local portfolio lender on a commercial loan on this house for a month or so. That loan product was going to be a 5 year balloon, 20 year am, with 1/2 point origination, between 4.5-5% APR and 80% LTV. We went all the way through the appraisal process and the house appraised at $253k. At the last minute, they backed out of the deal and stuck me with the cost of the appraisal. I was planning on using this same appraisal with my current lender but they ordered it in my business name and not my personal name so we had to do a second appraisal. They claimed that with my business name on the appraisal it was considered a commercial appraisal even though it was done using the sales comparison approach and in accordance with residential USPAP guidelines. I was upset at first but not when that appraisal came back at $265k and put another $8,400 in my pocket.

    So, long story for a short answer. 2 appraisals done and slightly higher than I expected them to come in at. However, when I originally bought the house I also figured I would be able to put a loan on it at 80% LTV and not be limited to 70%. So, I thought it would appraise lower but my final cash out turned out to be the same as I projected if that makes sense.

    0Reply
  • William Allen
    OP
    Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes
    10y
    Originally posted by @Jonathan Bonck:

    @William Allen 

    I apologize if I missed it in your original post. But I don't see the Online Lenders interest rate or their ROI for giving you $185K to purchase the house? Did you give them a long term share of the cash flow, equity, or depreciation? I know they would just give you $185K and a month later you give it right back with nothing for them.

    Thanks! 

    I used a conventional investor loan on the property. The terms were 4.5% APR, no origination fee, 30 year amortization, 70% LTV of the appraised value, and a lender credit to offset some of my closing costs. I also had to pay for an appraisal on the property and the standard closing costs that go along with any conventional loan product. Does that answer your questions? It is just like getting a loan on a purchase, I just did it after the fact to pull my cash out of the deal and do it again.

    0Reply
  • Laura B.
    Real Estate Agent · W Hartford, CT · Member since 2015 · 9 posts · 0 votes
    10y

    Thank you William Allen.

    0Reply
  • Bryan Rodriguez
    Investor · Colorado Springs , CO · Member since 2013 · 77 posts · 22 votes
    10y

    amazing! Great Job 

    1Reply
  • Jonathan Bonck
    Investor · Houston, TX · Member since 2015 · 57 posts · 21 votes
    10y

    @William Allen I apologize for not being more specific.

    Did you have the original $185K yourself or did you get it from a private investor? After reading back through your case history it sounds like you had the $185K cash saved up for yourself.

    0Reply
  • William Allen
    OP
    Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes
    10y
    Originally posted by @Jonathan Bonck:

    @William Allen I apologize for not being more specific.

    Did you have the original $185K yourself or did you get it from a private investor? After reading back through your case history it sounds like you had the $185K cash saved up for yourself.

    Ok, I think I see the confusion now.  Yes, my cash on this one initially then a conventional loan to take it back out and use it again.  I do have some private money lenders that I use but that money is typically used for flips.  They are usually short term lenders and I don't want to tie up their money in rentals just in case I can't refinance back out quickly for some reason.  Does clear it up?

    1Reply
  • Jonathan Bonck
    Investor · Houston, TX · Member since 2015 · 57 posts · 21 votes
    10y

    @William Allen Perfectly clear. Thanks William!! I am trying to do these types of deals as well. I am trying to use private lenders, which is why I was asking. 

    1Reply
  • William Allen
    OP
    Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes
    10y
    Originally posted by @Jonathan Bonck:

    @William Allen Perfectly clear. Thanks William!! I am trying to do these types of deals as well. I am trying to use private lenders, which is why I was asking. 

    You can certainly use private lenders too. Lots of ways to skin the cat, just try to be flexible on your exit strategies and give yourself a few ways out. 

    0Reply
  • Garrett MayPro Member
    Investor · Cleveland, OH · Member since 2008 · 67 posts · 14 votes
    10y

    William,

    Very informative post. I'm a newer investor, so I am looking for all the information that I can find. Thank you.

    Garrett

    0Reply
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