Private Money to Refi an all cash property?

Question

Hello,

Do more seasoned investors use Private Money to "fund" their deals after a purchase?  Or, Refi their money back out after the deal has been closed in cash?

Seems doable and easier than paying a large private money operation 2 points, 6% and a 5-4-3-2-1% early termination fee.  Anyone use individual or small org private money at say 9% for 6-8 months to cash themselves out of a deal they already own?

I have two properties I was able to pull down, partly because I was able to move fast with my own cash and not hunt for a lender.  My DTI is not great but the properties cash flow is.   I should be able to refi after 6months...but I don't want to wait & don't want to do delayed financing at the moment either. Local banks don't seem to want to lend to a out of state investor either (Indy investments and I'm in San Diego).  Want to use the velocity of money and keep going!

Having an already cash flowing property (which I do) that can cover the higher interest payment for short term seems like an easier sell for a possible private lender rather than a deal that "looks like it could work." Could be a way to start growing your money network??

Drawbacks I am seeing are title company fees putting the lender in 1st position for a period of time before you put better debt on the property and then cash them out.

Do folks do this, or am I thinking too hard?   Thanks!

Keith

Hunter Marshal · Answer

Keith-

I am a "mom and pop" lender, sent me a message with how to get in touch.

Keith Shadle · Answer

@Timothy Hero. PM sent.

Keith Shadle · Answer

Roger that.  Many thanks @Josh Caldwell $ @George Despotopoulos.   Was thinking more "mom and pop" style investors to avoid larger constraints by traditional lenders and no 6 month mark on anything or heavy underwriting.  Got a family member on one in first position making 9%.  Thinking there could be others that would want similar.  I can see how this upcoming November could be a wild card for some.

George Despotopoulos · Answer

@Keith Shadle, @Josh Caldwell provided a good insight and advice/strategy above. Not many institutions, be it banks, credit unions, non-bank lenders, etc,, are doing cash-out refinances based on appraised value prior to the 6 month mark. That's just not market right now. Also, with the uncertainty that the pandemic + elections bring many are being a bit more conservative now and probably that'll continue until Q2 of '21.

My opinion is that you either go Josh's route or look for a solid cash-out refi option @ month 6 if you're trying to get as much out of it as possible. There may be some lenders that would cash you out at 90% - 100% of your cost basis (purchase price + documented reno costs) from months 1 - 5 though. That may be a better alternative to delayed financing, where you'd likely be capped @ 70% - 80% of your purchase price only.

Timothy Hero · Answer

Hey Keith,

What are the current values of the properties and how much debt is on each property?

Josh Caldwell · Answer

What you are describing is doable but uncommon.  The problem is that most private lenders want their money back in 12 months. If you can pay the loan off without selling the property then there isnt much sense in taking that loan in the first place.  On the other hand, there are private lenders who want a long term passive income stream.  These tend to be the mom and pop private lenders and not the professionals. If you goal is to use this technique to build your roster of those type of investors, then this could work.

The traditional way of doing this, and the easier way IMO, would be to talk to potential private lenders ahead of time.  Tell them about you, and what you plan to do. Build a list of potential private lenders.  Then when you get a deal under contract that makes sense, send it to them, and see who is serious about wanting to make passive income.

That is what I do with my private lenders.  I package the deal for them, show them how we are going to make money, and they can either play of pass.