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!

[Sean McCluskey]

@Andrew Postell What should I do if I made my lien too small? For example, I bought a house for $100k and set the lien at $125k, because I knew that would cover my rehab costs. 

But now the ARV is $180k, and lenders are pretty strict on cash out refi's. Can I adjust my lien somehow, to make it 75-80% of the ARV ($135-$144k)? Would I file a payoff and a new lien of the new amount?

[Andrew Postell]

@David Ouellette the 6 month "seasoning" usually starts when you purchase the property.  Keep in mind this whole post is how to avoid any seasoning but if you do hit it, it is usually from the date you purchased the property.

[Andrew Postell]

@Sean McCluskey well, the intent here is to get the money you came out of pocket to purchase and rehab the property.  Whatever you "borrowed" from yourself to accomplish this. So even things like closing costs, utilities, gas you put in you car, mulch you bought for the flower beds, ANYTHING you used to purchase a business asset.  Especially right now I would encourage you to keep as much equity as possible while making yourself as "whole" as possible on your out of pocket expenses.

One of the things that will occur during this process that you have never seen before as a consumer is that banks talk to each out about your loan. So while we can see that there is a lien on title...we don't know if you have paid down that lien, taken draws on it, etc. So your lender will call the lien holder, you, and ask "hey, what's the actual payoff of this loan". And that's where you can get really specific about how much you owe. So if you filed a $125,000 lien, but actually spent $130,000, then just make the payoff for the lien be $130,000 and that will make it all workout. Assuming $130,000 doesn't go over the 85% LTV limit of course. And it's usually a form they send to you to complete.

Thanks!

[Sean McCluskey]

Dear @Andrew Postell,

I'd just like to say, my dear sir, that you are The Boss.

Thank you so much for all of your help!

Sincerely,

Sean & The Rest of the Biggerpockets Community

[Adah N.]

@Andrew Postell Thank you for this post. Went searching and this post is right on the money and fills in some gaps for me. Question - Is it considered buying with cash if property is purchased and rehabbed with funds entirely from HML and out of pocket? Or does all the cash have to come from out of pocket, family, friends etc?

3 years later do all the rules still apply? Thanks!

[Michael Pullins]

Great Content.

[Andrew Postell]

@Adah N. this is entirely with cash.  Meaning, you are using either your cash, or someone else's cash.  This whole process is how to file your own loan.  Using Hard Money...they file the loan.

[Stephen Polk]

@Andrew Postell

I stayed up and read this post from about 11 30 to 1 am trying to disect it all lol. You rock man!!! Thanks for sharing this info. I'm in the process of implementing this strategy. Few questions:

1.Can you use the same LLC to refinance that you used to originate the lien?

2. Can you refinance day 1, meaning before you finish the rehab? Will the bank refi on the ARV vs the as is value, before you finish the remodel?

[Andrew Postell]

@Stephen Polk thanks for posting and thanks for the kind words. Since we are talking about Fannie/Freddie money here, their loans require that you refinance into your name. So the LLC is used JUST to lend you the money. The loan and the property will be in your name when you close with a Fannie/Freddie loan.

And we want to refinance after the rehab is done. So if you buy a property that doesn't need rehab...then refi right away, day 1. But if you do need to improve the property to increase the value, then we want that work to be completed so we get the full After Repair Value (ARV) on the home.

Hope all of that makes sense but feel free to ask anything additional.  Thanks!

[Adah N.]

Originally posted by @Andrew Postell:

@Adah N. this is entirely with cash.  Meaning, you are using either your cash, or someone else's cash.  This whole process is how to file your own loan.  Using Hard Money...they file the loan.

Ok, thanks

[Stephen Polk]

@Andrew Postell. Got you. Thanks for the clarity. So I usually refinance into a conventional loan, not sure if they're backed by Fannie or Freddie. If I use this strategy, am I able to use the same LLC? m a fan of leaving loans in the company's name for the most part.

[Nick Spenello]

@Andrew Postell Does the timing of setting up the LLC, creating the mortgage, and filing the deed matter? Or just making sure to have the deed filed with the county at some point before the conventional finance happens? I ask because I closed on a property a couple weeks ago, and paid cash (part my own HELOC, part my own cash, and part private lender). The renovation should be complete by the end of June, so I would love to finance in July rather than November. I already have an LLC set up for my normal business operations, and could easily go through the process of filing the deed now.

[Andrew Postell]

@Stephen Polk Fannie/Freddie do require that the loan and the property go into your name. So if you are using a loan type that is ok with leaving the property in the LLC/Company at closing then that is going to be some type of a commercial/portfolio style loan. However, most people just close using Fannie/Freddie money and then change to the LLC after they close. That's usually the most common method.

[Andrew Postell]

@Nick Spenello if the loan is in the "1st position" then the filing of the lien does not matter.  However, if your "private lender" did record a lien that would require different steps.  So if the property is free and clear (no loan) then file it at any time.

[G Calendar]

I closed on 5/15/2020 then filed my "mortgage/lein" on 5/19/2020. Everything is looking good from what I can tell on the County clerk records site. We will find out in July when I refinance. I'll report back for sure! 

[Nick Spenello]

@Andrew Postell Thank you Sir!

[Bryan Freeman]

Originally posted by @Andrew Postell:

@Bryan Freeman yes, set the loan up with 0% interest, no monthly payments, and a balloon at the end of the term.  However, I would encourage you to finish up your current loan before doing anything.  I cannot speak for your current lender on what they will do.  So finish that up first.

Hi Andrew,

My mortgage broker is telling me that the underwrite contacted Fannie Mae and was told that we have to wait until 6 months for seasoning because I am paying myself off? I set everything up as I understood it in this thread, with the security deed to my LLC, which i am sole member. Any advice?
 

[G Calendar]

@Bryan Freeman assuming you are refinancing your LLC loan as Andrew laid out and not doing a cash out refinance. Can you try another lender? Also let us know if this was a national lender that we should steer clear!

[C-Dell J.]

@Bryan Freeman 

I’m planning to use this strategy as well. Did you ask for a Rate and Term Refinance( no cash out )??  

[Andrew Postell]

@Bryan Freeman unfortunately, I cannot speak to every lender in this forum but we have been writing these loans for many years.  As suggested above I would seek out a different lender.

[Don Pham]

@Andrew Postell Pardon my ignorance, but could some form of this strategy work for a property that one owns free and clear? I've owned a property free and clear for many years now, and I had considered doing a cash-out refi. However, I heard that it's usually more expensive than just a regular refinance. Could I have my LLC issue a loan and lein on the property then refinance the loan? How would the mechanics of that work?

Thanks in advanced for your help!

[Andrew Postell]

@Don Pham yes, if you would like you could do it that way.  This strategy is mostly for people who purchase properties with cash....since there are so many restrictions to refinancing in that scenario.....so just refinancing a home that you have owned for a while won't face many restrictions.  But you could file a lien if you wanted to.  

[Bret Winegar]

@Andrew Postell  Thanks! This is really fantastic content.  I plan on using this strategy on my next property.  Do i ask the title company to file the mortgage as part of the cash purchase, or is that something that is done afterwards?

[Andrew Postell]

@Bret Winegar yes, asking the title company to file and create the Deed of Trust is a super easy way to know 100% sure that it was done correctly.  They can file it at closing or even after closing if you need to do it that way.  But do rely on them to help with the paperwork.  Thanks!

[Kevin Tran]

@Andrew Postell Thank you for sharing these steps. Speaks to its effectiveness that this thread is 3 years old and still going strong today. I'm in the process of closing on a duplex in an all cash deal. It's an off market property I found through my wholesaler and paying $240k, the estimated market value is around $280K without any additional work. I really like your idea on the LLC lending and intend to implement this by using my LLC to lend to myself to fund this purchase then refinance into a conventional loan. Now, my question is: I want to refinance 75% of the market value of $280k, but having purchased it at $240k what would be the best way to ensure the lender would refinance the market value rather than the purchase price?

Thanks for your advice,

Trong