Using credit to purchase a property and then immediately cash-out refinancing to pay it back - is this possible?

Question

I have a small amount to use as a down payment but a lot of the properties I'm looking at are "cash only" and no financing available. Is it possible (with good credit) to get an unsecured line of credit, use my own cash for 20% and the LOC for 80% and then almost immediately turn around and refinance the property to pull the cash out to pay off the LOC?

The likely scenario here is finding a rehab-able property but it's selling cash-only, get a LOC and split it 80/20 with LOC/personal funds, do a little rehab with LOC money and then refi for ARV after the rehab. In this scenario the ARV would need to be 80% purchase price + rehab - and ideally even a little more for some immediate cash-out.

In the most-ideal scenario I'd use the LOC for 100% of the financing+rehab and the ARV would be high enough to pay it all back and still leave me in a 20% equity position when I refi'd with conventional financing.

Is this a feasible scenario to get into cash-only properties? Is there a better way of getting financing than this? Is there a required 'seasoning' period where the bank may not recognize the ARV on a rehabbed property so close to a sale even though it's been rehabbed?

My goal here is buy-and-hold rental property, but I could see this being a good flip strategy too and not needing to refi it then. Interested in the opinions here and if anyone has connections for this type of financing (or other financing) to do deals like this. I have a few potential properties but no way to move on them!

Thanks!

Linda Weygant · Answer

I think your main problem is going to be Proof of Funds letter that usually accompanies your written offer.  Proof of an adequate Line of Credit may not be the same thing.  Talk to the listing agent of one of the properties you've seen and ask them if proof of a Line of Credit would be adequate.  (Unless you're using an agent to find properties.  Then ask that person).

Jimmy Mooney · Answer

Rent only needs to carry the refi. I pay the LOC off with the refi and only use the LOC again on the next deal.

I don't think a lender would care about 100K LOC with a conv. loan in the 100K range - but I haven't actually done this. They easily lend more than that to individuals every day!

Stephen Chittenden · Answer

I don't think first key would consider the personal LOC at all. They run DTI just on the property.

Stephen Chittenden · Answer

I imagine that you might have lender who wants to pay off the LOC, but doing so would be kind of silly, as you could immediately turn around and draw on it again.  I imagine most would want to qualify you using both the LOC monthly payment with the payment on the property loan.  FirstKey also offers loans that allow you to refinance like this.  They're commercial loans, and the property has to be owned by an LLC, but it can be done that way too.  They qualify based almost exclusively on the income from the property being financed, so they won't be too concerned about the personal LOC.

Albert Bui · Answer

Yes however if you cash advance and max your card out you may lower your score 60-100 points temporarily and you may find that your score is too low to cash out refinance in which case you may not be very happy.

Solution: cash advance up to 30% or less on multiple cards then buy then refinance because 30% or less on revolving accounts will not affect your FICO scores as much therefore if you have income and enough assets/reserves your qualification will not be "hindered," by your fico/credit.

Hope that helps.

Brian Ky · Answer

Check out the webinar from last week on brrr, buy rehab rent refinance. Sounds like it is the same plan you are trying to use in this purchase. Good luck.

Account Closed · Answer

oh i see. they are assuming the property either carries its own weight as a gud investment to the borrower or sinks as a bad one and they cash in on their secured interest in it, regardless of the LLC's other debts, income, etc

Account Closed · Answer

Yep great point, as the unsecured LOC could be drawn on again but at least the equity loan would be secured by the lender so I imagine they'd be more concerned with worse case scenario where the borrow is left to carry both the new equity loan and the old LOC together indefinitely. With FirstKey and if a property in this purchase method were that of an LLC, wonder how the income exclusively from the property would carry both the new loan and the LOC amounts total. Must be a pretty darn good rent roll!

Nathan Lenahan · Answer

It is possible to refinance out with commercial loans that require no seasoning.  This will allow you to place properties in an LLC and shorten your entire acquisition cycle therefore reducing your holding costs.  Your math above did not account for holding costs - so that 2K could very quickly become cash out of your pocket.

Also be aware that commercial loans operate differently than conventional mortgages.  For instance we closed on a house today with cash and after rehab and placing a tenant we will complete our refinance through a local bank.  The loan is amortized over 20 years with 5 year terms for rate adjustment.  They also offer the flexibility to package multiple homes together in the same loan if we desire, but the terms remain the same. The best part is they will loan on 85% LTV/LTC whichever is lower, so the upfront purchase with cash is essential for us to get all of our money out of the deal later.  And to boot, they only do appraisals on loans that exceed 250k, which makes it even nicer.

Account Closed · Answer

I screen out cash-savings buyers, from folks hoping to borrow enuf cash last-minute *after* their offer's accepted, by requiring VODs (ie, actual statements as opposed to 'proof fo funds' letters/printouts) which show 30 days of recent activity which led up to the total $ in their account, whatever it is.

I'd be interested in what sort of loan you end up getting to 'refinance' (pay off) the LOC borrowed to purchase the property; would the lender pay off the LOC for you or would they actually give you 'cash out' of your equity?- in which case then underwriting would likely *combine* the LOC monthly payment with the new 'cash out' monthly payment and compare it to your documented income.

Using credit to purchase a property and then immediately cash-out refinancing to pay it back - is this possible?

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