How To: Cash out 1-4 unit Property

[Andrew Postell]

Receiving a cash out loan on an investment property can be a very confusing item. This post is designed to bring some clarity to taking cash out of a property with a conventional loan and help you navigate the sometimes-challenging cash out rules for properties. Admittedly, this post will probably be for the mid-level to expert level investor. There could be some important items in here if you are just starting out but it might get confusing in a hurry. If you have any questions, then please reach out. Lots of people on this forum can answer questions and many are very helpful individuals.

We will cover:

1. The conventional rules for a cash out loan
2. Buying a home with cash
3. How to properly structure buying a property with cash

1.  The Conventional Rules For a Cash Out Loan

Fannie Mae and Freddie Mac are the Government Agencies that sponsor conventional lending. Most banks will have these loans as an option. There are other loan types as well but for brevity we will limit this post to the “Conventional” lending (Fannie/Freddie).

• Conventional Loans limit your cash out on an investment property to 75% of the “After Repair Value” on a Single-Family home (70% on a 2-4 unit home). This is also the same percentage that you need for a non-cash out refinance (more on why that is important later).
• If you purchased the investment property with a loan, then conventional loans will require you to wait 6 month to take cash out.
  • This rule does not apply if you purchased the home with CASH (more on that in section 2).

Let’s explore some examples here:

• If you purchased a property with a 15% down conventional loan (85% loan to value) and you wanted to get cash out, you wouldn’t be able to do so since the cash out limit is 75% of the “Loan to Value”. The MAXIMUM cash out you can receive is 75% of the value of the property.
• If you purchased a property with a loan, but did the rehab on with your own cash, then you would need to wait 6 months to get that cash back. Keep in mind you could only receive 75% back of the After Repair Value.  
  • So if you bought a home with a loan of $50k, it required $30k in renovations, and it appraised for $100k after the repair work was complete then….
  • You would refinance the $50k loan, receive back $25k in cash…since $75k would be 75% of the After Repair Value.

2.  Buying a home with Cash

Buying a home with cash has become increasingly popular for many investors but often an investor will be caught with the restrictions to cash out loans if they need to get their money back. There is a plan to avoid this entire section (In section 3) but it is important for us to know about these restrictions. If an investor is buying with cash and flipping they get their money back when they sell the property. But if they are seeking to hold a property for any length of time and want their cash investment back there are some important rules to understand with conventional loan:

• If you buy a property with cash (or with a HELOC) you can receive a cash out loan on Day 1.
  • There is not a 6 month waiting period with receiving a cash out loan if you purchased a home with cash or with a HELOC
  • BUT you will be limited to the amount of….
    • Your purchase price + closing costs (costs when you purchased the home)
    • OR
    • 75% of the “After Repair Value”…

WHICHEVER IS THE LOWER AMOUNT (super important)

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.

3.  HOW TO PROPERLY STRUCTURE BUYING A HOME WITH CASH

With these rules, you can see how it can be confusing to get conventional lending when buying a home with cash but there is absolutely a proper method to structuring your deals when buying cash. Here’s the secret:

• Create an LLC and have the LLC lend you a mortgage on the property you are receiving.

The reason why this works is because instead of you needing cash or receiving a cash out loan, we are now refinancing a loan – your loan. There no reason to wait any time or have any “whichever is lower” rule come into play. We are just refinancing a loan.

Here’s how it works:

• You create an LLC
• You buy a home
• Your LLC gives you a loan for the home
• You file the deed for that loan at the county courthouse
• You use the money from the LLC to buy and fix up the property
• Once the property is completed, your conventional lender comes to refinance the loan
• Your conventional lender runs title and sees there is a loan.
• Your conventional lender refinances you into a new loan, and cuts a check to your LLC…a check in the amount of 75% of the value.

Please don't confuse this 75% with a "cash out" amount. The non-cash out LTV on a refinance is also 75%. We are refinancing a mortgage. Your LLC's mortgage. Essentially your LLC has become the bank/hard money lender/etc. However you want to think about it. You get to set the interest rate (it can be 0%) and you get your investment amount back sooner.

Some things to think of:

• To file a deed at the county courthouse is $100-$150 in cost (depending on which county)
• And you want that note to be pretty close to 70% of the ARV for the property if you don't want to bring any money to closing. 70% will allow you to roll in your closing costs. If you want it to be at 75% just keep in mind you would need to bring your closing costs out of your pocket to complete the refinance.

This was a lot of information. Feel free to ask additional questions if you need. Thanks!

[Andrew Postell]

@Clint Moore yes, speak to another lender.  The "under 1 year" think is a bank overlay specific to them.  That is not a rule that is a Fannie/Freddie rule.  Also, finding a lender who does these smaller loans might be challenging but they are out there.  If you have owned a home since June of last year none of the "delayed financing" rules apply anyway so you should be able to get a loan easily....just need to find a bank that does those smaller amounts.  Maybe try posting something about it in the Indiana forum? (if that's where the property is located).  Maybe some other locals people might have a good suggestion or two.  Good luck!

[Caroline M.]

@Andrew Postell

Thank you so much for sharing this post and all the helpful information!

I was wondering how this process works for multi families? I am closing on a 6 unit with all cash and using a private lender for 25k of it and the rest is my own cash. This would not be a conventional loan and I was wondering if anyone has done this multifamilies? I would like to refinance asap to pay back the private loan and get my cash back to buy another property. Any information you can share would be helpful. 

[Nyelle Johnson]

@Andrew Postell this is an amazing strategy I just purchased a home cash fixer upper in my name but I have an llc however it is new and I don’t have any credit built under my llc I myself have a 730 credit score is there any way to do this in my case?  

[Brian Garrett]

Originally posted by @Nyelle Johnson:

@Andrew Postell this is an amazing strategy I just purchased a home cash fixer upper in my name but I have an llc however it is new and I don’t have any credit built under my llc I myself have a 730 credit score is there any way to do this in my case?  

Yes the LLC doesn't need to have any established credit.

[Andrew Postell]

@Nyelle Johnson you are using the LLC to make the loan. The NEW loan, from the refinance, will be under your name. It's important that you know you can close a loan before doing this. You might already know the answer but if you don't then just get prequalified. It's usually free to do so.

[Nyelle Johnson]

@Andrew Postell thank u for responding so quickly is it possible to DM me when u have a chance I have a few additional questions i tried to DM u but it keeps going black and taking me to the home page 

[Nyelle Johnson]

@Brian Garrett thank u now I guess my question is how do u go about getting a loan for your LLC without the LLC having any creditvestablish ...can u tell I'm a newbie...if your able to DM for further tips I'd appreciate it I'm a newbie but I learn quick so I won't b a bother

[Neil Robertson]

@Andrew Postell

When I go to close the deal on the purchase do I bring a check that is from the LLC, then after file the dead with the court house? Because basically you are buying the property with your own cash.

Or does this not even matter 

[Frankie Woods]

@Andrew Postell So why do I have to "season" my property for 6 - 12 months when getting a hard money loan?

[Patrick Fraire]

@Andrew Postell this may be the best post in the history of BP... thank you

[Andrew Postell]

Lol, thanks @Patrick Fraire

[Patrick Fraire]

I may have had a few cervezas in me when I made that bold statement. Id like to rephrase to the best post I’ve ever seen on BP. 

[Jake Recz]

Great post! 

So technically speaking, if you use your own LLC to be your lender you can get your money back much quicker to rinse and repeat the whole process.

Now let's assume I purchase a property cash. 

The purchase price is $100k.

The property appraises for $100k. 

The bank is willing to give me 75% LTV (conventional loan).

The bank issues a mortgage for $75k. 

At this point I still have $25k tied up in the property. Basically a 25% "down payment". 

Is there any way to get my entire investment of $100k out of this property? 

I'm asking because after the first property I would have $25k tied up, on the second one I would have $50k (total) tied up, on the third it's $75k tied up..... and so on. There quickly comes a point where I'm out of capital to keep investing. Can anybody please clarify this for me? 

[Jake Saliba]

Wow, @Andrew Postell.  Amazing thread here.  True gold.  

To add to your strategy, I have also found that Freddie Mac allows for no-cash-out refi at 85% LTV for SFR investment homes if you find the right lender with no overlays! This can get to 100% end financing in more expensive markets with smaller ARV discounts....though positive cashflow is a separate issue that must be overcome :)

Question: Is there anything in Freddie/Fannie rules that would prevent me from the scenario below?

Purchase price = $100k

Rehab = $25K

ARV= $170k

1st position purchase loan (private lender) = $85k

2nd position purchase loan (my own LLC) = $40k

I purchase with 1st position loan at 85% LTC ($85k) from private lender. I loan myself 15% downpayment + rehab funds from my own LLC as 2nd position loan at time of purchase ($40k).

After rehab, appraise at $170k and refi out 1st position + 2nd position into 1 single loan at $125k total as a no-cash-out refi.  

I'd like to have enough $ to keep flipping on the side instead of holding in 100% cash until rehab+refi is done.  

1st+2nd is a lot easier sell to my private lender rather than asking to lend >100% cost of purchase in a single 1st position loan.  

I talked with a local lender who said this might work for end financing, but wasn't sure what underwriting would think about the 2nd mortgage.  He recommended to try to get everything into a single 1st position loan - but easier said than done if you're looking for a lender to give you >100% purchase price.  

Thanks for any help you can give! 

Also, please PM if you lend in AZ.  

-Jake

[Andrew Postell]

@Jake Saliba yes, Freddie does allow 85% but they only lend up to 6 mortgages.  So on your 7th you could only do Fannie and their max is 75%.  And Freddie has become a little more flexible since this post (they were only allowing 80% at the time if you owned the company) so while the original post mentions 75% you can go higher on your first 6. 

And your scenario can absolutely work if....you file that 2nd lien AT CLOSING. Meaning, it must be on the HUD or the Closing Disclosure. If the 2nd lien is placed after closing then it would be considered a cash out loan to Fannie/Freddie. You can absolutely do this strategy but you must file that lien at closing and have it show on your executed settlement statement.

Thanks!

[Shekeira Ward]

Originally posted by @Taylor Chiu:

@Account Closed Sure thing, so I am going with the ARM because we can pull 80% out instead of 75% with the method described by Andrew. Plus it is less complicated to pull off.

 Maybe I dont know enough about ARMs, but what is your exit/payoff strategy when the payments balloon in 5 years?

[Jack Forester]

@Andrew Postell, is there anything that prevents me from my LLC loaning me the purchase price plus rehab costs at time of closing? Does the rehab money have to go into an escrow account?

My thinking is this:

Purchase Price: $100k

Rehab: $20k

Loan from LLC is $120k

ARV: $150k

80% Refi: $120k

I recoup 100% of my cash, assuming it appraises at $150k

If ARV is $125k

80% Refi is $100k, so I'm left with $20k in the property. 

If I had done all cash of $100k, then performed $20k in rehab with an ARV of $120k. Then I could refi cash out for the lesser of 75% ARV ($90k) or the original closing statement amount of $100k. So I get $90k and have $30k tied up in the house (assuming I can find a bank that will do this).

The LLC loan route with embedded rehab costs returns $10k more to my pocket. If the initial LLC loan to me can include rehab costs, must the rehab money be kept in an escrow account?

[Jack Forester]

@Andrew Postell, sorry for whatever reason, the mobile app on Android was not resolving your name tagging.  See above.

[Shekeira Ward]

@Jack Forester great question. pondering along the same lines myself as far as escrowing the rehab money.

[Andrew Postell]

@Jack Forester this is EXACTLY the benefit of doing this strategy.  You get all of your money back.  You have it exactly right and this is precisely what many people do over and over again.  You don't need it in an escrow account or anything like that.  If a company files a lien on the deed of the property then it can be refinanced.  It can absolutely be a renovation loan...just like many hard money loans are.....except this time you are your own hard money lender.  So have a loan from your company that includes the renovation costs is completely fine and pretty standard with this method.  @Shekeira Ward that is the answer.  Thanks!

[Maria C.]

@Andrew Postell Hi Andrew & BP Community! I am about to buy my first property and found this post. I am buying a town home in personal name through a wholesaler and will close in 10 days (9/10/18). Was going to just pay cash using funds deposited in personal account borrowed from a HELOC, until I saw this. I am a definite NEWBIE, so here goes ...

I know it's overkill right now, but I'm OPTIMISTIC. My REI business setup includes:

A Traditional single-member LLC I plan to use as an operating/management company (shell/operations/transactions) for my rental holding company. All transactions and contracts will go through this operating co.

A Series LLC - which will hold all rental properties through each property land trust "child" which will be created (after Refi) , and the property will be transferred to the land trust for asset protection/anonymity.

I would like to use your LLC loan strategy to get the lien on the property at closing but not I can and how I should do it, so here are some questions:

1) Can I Use Operations LLC to make a loan to me, draw up the note, and give to title company to use LLC lender info to record the deed?

2) Does my note also get signed at title company closing, but only the deed with the loan info get recorded, and LLC keeps note in records?

3) Operating LLC does not have enough funds currently, so do I need to deposit the HELOC borrowed funds from my personal account INTO the Operating LLC as a cash contribution, and THEN have the Operating LLC provide full funds needed at closing (i.e., purchase price, Rehab amount, closing costs)? And just make sure as much as possible to have the note amount equal the total of purchase, rehab and closing costs, or a specific % of those totals in order to be able to get the most from Refi?

4) Lastly, trying to understand that if I get funds from my HELOC, I will have a monthly payment. AND since I'm putting funds in the Operating LLC, paying funds at closing from Operating LLC, and signing personal note/loan with Operating LLC, from legal entity/IRS/tax record point of view, don't I need to be personally making a loan payment to Operating LLC, or risk legal problems with the LLC entity? Just seems like I have to show money flows through the LLC, which can only happen if I actually pay money to the LLC.

One way I'm thinking is if the note between me and my LLC shows quarterly or semi-annual payment, or some other payment terms, that would give me time to Refinance the loan without having to make any type of monthly payments to the LLC and just take care of the HELOC payments.

Right about now you're probably really sorry you've been so helpful, BUT, you can tell I am very green behind the ears!!

Any reply about my questions is greatly appreciated. Also, if anyone else can chime in about any of the legal/tax concerns, I thank you also!

Gracias, gracias, and MUCHAS GRACIAS,

Maria

[Damon Nash]

@Andrew Postell I too am having brain blocks to this post and am really looking to understand. I currently have a rental that was purchased with hml and I'm looking to refinance it into conventional. If I've understood correctly the max is 75% ARV since I rehabbed it? I'm wanting to do cash out refi, and it was purchased in my LLC with the hml. So, am I able to refinance it still keeping it in my LLC or will I have to refinance into my personal name then transfer deed back to LLC?

The loan amount is very small, but I have 1 other that is in the exact situation. So, would I be able to do them both and roll into 1 loan? 

Also, my mother just finished rehabbing her first rental which she bought with hml in her personal name less than 6 months ago. Is her max 75% also? And does she have to wait 6 months to refinance it into conventional loan?

I'm in Dallas. Thank you.

[Frankie Woods]

In my experience, conventional financing (i.e., financing backed by Freddie / Fannie) requires the loan to be in the buyers name.  Commercial loans are much more lenient but generally have less attractive terms (e.g., higher rates, shorter amortization, balloons).

The six to 1 year "seasoning" requirement is for cash-out refinancing. If you don't pull cash out, you can refinance immediately. 75% LTV is typical for rental property but YMMV.

[Shawn Ackerman]

@Jake Recz yes, there is a way to get 100% of your investment-minus lender closing costs back out of your deal. You have to offer and purchase at 75% of ARV. But using your above scenario you will have your money in the deal. I have done many of these deals. But you make your money on the buy my friend.

[Andrew Postell]

@Damon Nash thanks for your patience here (I just got back to Texas from a trip) but let me answer these one at a time:

• Is 75% my max LTV? - If you have the option of going through a Freddie Mac loan product your maximum is 85% LTV if you are doing just a "rate and term" refinance....meaning, no cash back.
• I'm wanting to do cash out - If you purchased with a loan and want cash back your maximum is NOW 75% with a Fannie/Freddie product and you'll have to wait 6 months to receive $1 back.  There might be other loan types that go higher but the rates and terms of the loan will be different.
• Am I able to keep my LLC? - For Fannie/Freddie you will need to change your deed at closing, then change it back after closing.  Again, other loan types can be different but the loans are different too.
• Can I do both into 1 loan? - If you are looking to keep your homes for a long time I would advise against this.  If you have separate loans then the rates are better.

Hope these help in some way.  Thanks!