Cash-out Refi. Necessary for first property?

Question

Hey Everyone! First post here but long time follower. Been itching to get my passive income journey started and am committed to buying a property this year. Been doing all the recommended items of visiting properties, talking to real estate and finance agents, running deals, etc. And now I believe I have found a deal to move on but I have one slight issue with this deal, I do not believe I will be able to do a cash out refi as it is in near turnkey property and I am only estimating 5K in paint and lighting fixture changes.

My questions are as follows and any guidance from the community will be greatly appreciated!

1. I will likely tie up all of my personal money in this first deal. Is this bad? I can save money at a very high rate with my W2 job.

2. I would like to buy more than one property this year. This deal would get me to 60% of my goal on passive income this year. Any advice on goals vs if the deal is good do it?

3.  I believe the rents are 15% below value on the conservative side. If I get the rent up and have the financials to show the bank, will the likely allow me to refi at a higher amount allowing me to take some of the cash out? If yes how long will this take?

Thanks! Pete

Peter Teachen · Answer

James and Corby thank you so much for quickly responding and the encouragement.

James,

1. I have enough for the down payment of 20-25% to get the financing.

2. This is the issue. The LTV wouldn't increase that fast to allow me to pull out my 20-25%. As I would buy it at Value and its newer construction. So unless appreciate really picked up my LTV would stay near that 80%.

Yea I am very interested in the BRRR strategy as I am an architect myself and have connections with contractors however my biggest fear is I don't have the time to manage this outside my job. How hands on are you on your first couple of BRRR deals?

Corby,

Thanks for the tips! Yea since this is my first deal I am sure getting the ReFi will be hard that is that favorable. My DTI is great rate now but once I buy a property it would not be and my experience would likely be the deciding factor for the Bank.

Corby Goade · Answer

Congrats, good for you for getting the ball rolling!

1. I will likely tie up all of my personal money in this first deal. Is this bad? I can save money at a very high rate with my W2 job. While it is important to have reserves, I think people overthink this. If you have excellent W2 income and a good insurance policy, it's not the end of the world if you have low reserves for a couple of months. It's likely the most expensive repair you could have would be a roof, and you don't typically have an emergency that calls for a new roof immediately, and if you do, it's probably an insurance claim anyhow.

2. I would like to buy more than one property this year. This deal would get me to 60% of my goal on passive income this year. Any advice on goals vs if the deal is good do it? I don't advise people on their financial goals- everyone has a different level of risk tolerance and cash position. If you are happy with this, that's awesome, keep at it.

3. I believe the rents are 15% below value on the conservative side. If I get the rent up and have the financials to show the bank, will the likely allow me to refi at a higher amount allowing me to take some of the cash out? If yes how long will this take? Probably not- commercial property values are based on CAP rates and NOI. Assuming this is a residential property (fewer than five units) your property value is based on comps- similar properties nearby, so rents are irrelevant to value. That said, your ability to get a new mortgage or cash out is partially based on your DTI ratio, which IS influenced by your rents. Most conventional lenders will not count rental income until you have been an investor for a couple years. Even after that, they only account for 75% of your rents, leaving that 25% window for vacancy, capex, etc. So- if you raised rents by $100 per month, a bank would only credit your income by $75.

Good luck out there!

James Dunwoody · Answer

@Peter Teachen I don’t think it’s bad to use all of your money to purchase it your intention is to do a cash our refi. There’s a couple additional questions I would ask to determine if it makes sense for you or not.

1 - Is the cash you have enough to purchase it out right?

2 - Are you planning on keeping any money in the deal? If so, what percentage of the LTV, assuming you can refinance at 80% of the appraised value?

If you have enough cash to purchase one you can use the BRRR strategy to do multiple properties. Even if you don’t have enough you can use a hard/private money loan as a bridge loan to purchase so that you can refinance once you own it. There are plenty of loans out there that don’t require very much seasoning if any at all.

Depending on your strategy and whether or not you want to keep any money tied up in your deals will ultimately determine determine your path. The bottom line is whether or not you have money to buy or not all of this is possible it just depends on your expertise, credit, and how good of a deal you have.

Hope that helps.