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]

@Jonathan Balog yes, you can 100% do that.  The source of the funds is inconsequential to this strategy.  Now, I think a CPA might tell you to take that Line of Credit, and deposit into your business account.....but that's for accounting.  The loan does not need anything like that.

[Ben Chan]

@Andrew Postell Ran across you referencing this in a different thread and I'm blown away by this and surprised I only saw this now. This is great and I can't wait to try this on my first deal! I'm doing more research and how to prepare for this now. Thanks for this post!

[Jeff Goodale]

@Andrew Postell thanks for sharing the post

I have read every post a few times and have a few questions. I will try to recap my understanding so you can correct me.

The important thing is to establish a mortgage deed (lien / loan record) that is filed with clerk of court. The loan needs to be arms length which is why you suggest LLC. I can be sole member but because the LLC is the lien holder (not me as an individual) the bank should not see that as an issue.

That lien / loan needs to have finance terms such that refinancing with by Freddie/Fannie terms would clearly be seen as a “benefit to the borrower”.

There is no true loan transaction needed we just need to file the lien stating that LLC has made a loan so that LLC can be shown on record as being in first position holding a note/ mortgage deed or deed of trust depending on the state. This document is what we will refinance with a bank once rehab is completed and we are able to establish a higher ARV.

We are not worrying about which is the lower of HUD (purchase) price verse LTV % because we didn't buy with cash. Since we didn't buy with cash this isn't Delayed Finance but is a straight refinance. Since we also aren't going to ask for cash we don't have to wait 6 months to refinance.

I am Leary as to why the bank wouldn't be concerned about the LLC and the buyer having the same address and (at least one LLC member) being the home owner. A mortgage deed I recently completed showed the loaning party's name and address. They would be exactly the same as the homeowner (me) who wants to refinance.

Example of transaction:

Purchase price 80k

Closing costs 4K

Rehab estimate 20k

All in price 104k

LLC is shown at time of closing as loaning 110k (extra in case rehab comes in higher).

It appears I would only wire to Title company 84k (purchase + closing). The 20k for rehab does not have to go through ugh title/escrow company.

If after rehab Appraiser shows 125 as ARV.

Bank would be willing to refinance at 75% of 125 which is $93.75k

At the refinance closing the Bank will need to issue a check/wire/ach to pay original loan. I assume they will need banking info ( acct # and routing info) of LLC so they can make payment to LLC of the 93,750.

Because the 93.75k doesn’t fully satisfy the lien of $110k how does that work? Will lien still show as open?

If ARV had come in at $155k then 75% would be $115. I assume since we aren't getting cash out then we are limited to $110k. (Value of Loan recorded).

Looking over what I typed it isn’t super succinct but hopefully you see a couple of questions in there and can speak to my comments.

I appreciate the advise.

Jeff

[Gurveer Khang]

@Andrew Postell

Thanks for this informative post! I have question regarding the timing for the LLC lien. If I buy a property at auction and pay cashier check same day, can i put my LLC lien for refinance purpose few days later once they have recorded the deed?

[Jonathan Newsome]

@Andrew Postell Thank you for the vast amount of knowledge you bring to this particular subject! I was looking for a post that talked about this method in depth and I’m more than glad I found yours.

I do have 2 questions:

1.) I know you mentioned to use the LLC/lien method, which I'll more than likely be using, (and my 2nd question IS geared towards that method) but is it still possible to use the "Buy cash, delayed financing method" here:

buy/purchase a SF with "cash" (private/hard money lending to my LLC), include the repairs on the HUD (contractor invoice) and recapture the total purchase plus repairs with no seasoning, provided they meet 75% LTV of ARV? Scenario:

Lender lends to my LLC

Purchase price $50k goes on HUD form

Rehab $20k include this on HUD form

Closing cost $3k on HUD form

All-in $73k

ARV $100k

75% of $100k = $75k, lesser of two is $73k so can we recapture the $73k. <—— is this possible w/o seasoning, if we were able to include rehab on the hud?

2.) Just confirming I have this one down too, can I use a PML/HML to loan my LLC the purchase price + rehab cost and then in turn have my LLC loan me the funds for the purchase and rehab cost to fulfill your section 3 criteria? And In this instance would I need 1 or 2 liens (file 1 or 2 deeds against property at courthouse), 1 for PML/HML and 1 for my LLC or am I totally off?

[Andrew Postell]

@Gurveer Khang yes!  This is one of the main purposes for this strategy.  You can file that lien at any time....just like a normal lender would.

[Andrew Postell]

@Jeff Goodale your description in your first 5 paragraphs is right on.  All of those statements are accurate.  

Now, we are talking about Fannie/Freddie money, here.  So I understand your concern....but it's not up to the bank.  It's up to Fannie Mae and Freddie Mac.  These are THEIR rules of lending.  So it's not against policy for you to own a company.  Think of it like if you owned Bank of America.  If you owned BofA, could you get a loan from BofA?  And then could another lender refinance that loan?  And the answer is yes, absolutely!  Owning the company is not a prohibited action and I have spoken with Fannie/Freddie about this strategy on multiple occasions.  We are following THEIR rules here.

Now, admittedly, most lenders don't understand what we do as investors.  If we went to a lender and said "I want to do a wrap on a subto property that I BRRRR'd and house hacked".....most won't understand WHAT we are talking about.  So when we speak to banks....we kind of have to speak their language.  Just make sure to tell them that you want to refinance a loan and that's how you get it started.  

For the "Loan to Value" and the mortgage "payoff" there are some important steps here.

Freddie Mac can only lend up to 85% of the ARV. So if a bank only offers Fannie...then you won't be able to go that high. Make sure you are working with an investor friendly lender.

I would certainly set your initial lien to either the limit of your all of your costs (out of pocket) or your loan amount that you want when you refinance.....but do whichever is lower. Technically it won't matter but I encourage people to do that so they can understand their out of pocket amount easier. So if you want your final LTV to be 80% of the ARV...then make that filed lien that figure as well.

One of the things that consumers don't see is that lenders talk to each other during loans.  While we can see that filed lien on the title work....we don't know if you have paid it down, drawn more money, etc.  And that's why lenders call each other to ask a couple of things:

1. What is the payoff of this loan?
2. Is the loan in good standing? (meaning, has the customer paid on time)

You will see these steps occur since your company is the lender on this transaction. These questions are usually answered with a form that is required to be filled out.  Some lenders may just call though.  But you cannot answer these questions yourself though.  Imagine if you WEREN'T the company owner "sure, the balance is $0", it would cause some issues.  So a friend, a spouse, anyone really....well, anyone not on the loan can answer/validate these questions.  But that's how lenders know how much of the filed lien we need to pay at the closing table.

*WHEW*  I hope all of that makes sense but feel free to ask anything additional.  Thanks!

[Andrew Postell]

@Jonathan Newsome I think what you are describing is something different. If you are borrowing from a Hard Money Lender, they will file a lien on the property. You aren't buying with cash you are buying with their loan. So when we go and run title we will see a lien from the HML which will then be paid off. Does that make sense how I am describing this? This strategy is designed for people who actually purchased a home with straight cash....meaning, no loan from anywhere. If you buy with cash you have all these restrictions (first 2 sections of my post describe these restrictions). If I am misunderstanding you please let me know. Thanks!

[Jonathan Newsome]

@Andrew Postell So in that case if I borrow from a HML or private money lender and they file a lien on the property, there's no need for me to use the LLC method because the bank will see the HML/PML lien and pay them back the money (after refi), correct?

And with the above method, I can still receive the “refi” aka pay back the lenders, with no seasoning period?

[Jonathan Newsome]

@Andrew Postell or what I should of asked is, if I use hard or private money and they have a lien in place, could I still use one of the 3 methods in your write up to get their loan paid without a seasoning period?

[Andrew Postell]

@Jonathan Newsome Well, the correct answer here is that there is no seasoning when you have a loan in place. You will be able to refinance out of your hard money loan on day #1. No seasoning. No waiting. Using the full ARV (if the work is completed thats). You can only refinance the amount of that existing loan though. Most HML's lend up to 75% of the ARV. So if it takes 80% of the ARV to purchase and rehab the property, you will have to come out of pocket 5%...but you can refinance that HML right away.

[Jonathan Newsome]

@Andrew Postell awesome, that’s exactly what I was looking for! I really appreciate the information that’s you’ve provided!

There has to be a way that we can help you out a bit? I see you’re a lender and from the Fort Worth area? Maybe I can refer some contacts to you? I’m from the DFW area myself, just in Virginia for work. What type of lending do you offer? I’d like to bring you some business or find a way to add value, at the least.

[Andrew Postell]

@Jonathan Newsome thanks for the kind words. We aren't permitted to self-promote on this forum so anything I would say would be removed but I think I can provide a link to the forum where it is allowed.  Let's try it.  CLICK HERE

[Jeff Goodale]

@Andrew Postell

Thank you for all of the clarification In your reply to my post!  Coming back to your original point... the bottom line is that if there is a lien then it can be refinanced at anytime (you don’t have to wait 6 months)! I get it now.

However, I am a little confused on you comment below:

“I would certainly set your initial lien to either the limit of your all of your costs (out of pocket) or your loan amount that you want when you refinance.....but do whichever is lower. Technically it won't matter but I encourage people to do that so they can understand their out of pocket amount easier. So if you want your final LTV to be 80% of the ARV...then make that filed lien that figure as well.”

I am thinking that the bank will refinance at the lower of the original loan or at 75% of ARV (85% if using Freddie). If this is accurate then wouldn't I want to I set the loan amount to be slightly above my 75% ARV target not lower? If ARV comes in higher than estimate and I had set loan below or at my original ARV estimate then I would be refinancing below final 75% of ARV. Seems like I misunderstood what you were trying to convey.

I do have a better feeling on the overall concept. Thanks for the answers it has helped a lot.

[Harry Hylan]

Great Info. Thanks

[Andrew Postell]

@Jeff Goodale for whatever reason the name tag you used for me didn't work, very sorry or I would have responded sooner.  The whole point of this technique is so that the bank WON'T do the "refinance the lower" thing.  That's a "delayed financing" rule and we are doing this to avoid that entirely.  Filing the lien means that he lender will refinance that lien.  And one of the things that your new lender will ask your current lender (you) is "what is the payoff of this loan".  Lenders can't tell if you paid it down, made a draw, etc.  And that's why we ask for payoffs from each other.  So even if your lien that was filed is a little different than the actual payoff of that loan...it's ok.  That is very normal in the lending world.  You will now see it since you are a lender with this strategy.  Hope all of this makes sense.  Thanks!

[Dakota Adney]

@Andrew Postell deserves some sort of award from Bigger Pockets for this thread (e.g. a "knighting" ceremony officiated by @Brandon Turner). I'm sure you've spent dozens of hours writing this and responding to each question. Thank you for being a tried and true member of the community! 

[Andrew Postell]

@Dakota Adney thanks for such kind words.  Glad to be able to help!

[Brian Salazar]

@Andrew Postell

Are there any licensing requirements for the LLC? It seems like when I took the national exam you were limited to a certain number of originations per year (like 5 or less). Any more than that and the mortgage had to be originated by an RMLO.

[Andrew Postell]

@Brian Salazar Hmmm, for this strategy it is not required.  And I am not a compliance officer but I think I can at least provide some guidance at least.  If you are lending government loans to others - then yes, you must be licensed.  If you are lending another private person's funds as a mortgages to others (like a Hard Money Loan) - then each state will determine if you need to be licensed (I think about 13 of them require it last time I checked?).  But if you are lending your own private money to yourself...I don't think there would be anything that addresses that specific scenario...meaning that if it's not a PROHIBITED action, then you are free to do it. Certainly check out your state laws regarding this subject if you think it is an area of concern.

[Antoinette Munroe]

@Andrew Postell

On the mortgage note, Will I sign on behalf of my LLC or do I need to have a member or registered agent in place to sign on the LLC's behalf so that my name is not on both ends of the transaction? Worried this might look sketchy to a lender.

[Sean McCluskey]

@Andrew Postell Thank you again for this wonderful knowledge!

I am employing this strategy on my latest BRRRR. I told my escrow/title about it, in order to register the lien and escrow rehab funds on my HUD-1 settlement statement. The title officer asked me if the LLC would want lenders title insurance.

Do I need to pay for title insurance for my own LLC that is giving me a note, in order to get the lien recognized and paid off in a delayed finance exception? Would my next lender care about this? The next lender will require lenders title insurance anyway, so I don't need it on my own transaction, right?

[Joseph Brown]

@Andrew Postell great job. I know u just explained that the best u could . Good job in doing so. Would u beable to explain to me how to do this strategy if i already purchased a house all cash however i put it in my personal name already. Is this strategy dead to me since the deed was already recorded to my personal name already.

[Andrew Postell]

@Sean McCluskey no need for lender's title insurance for this type of a lien.  It's your lien, so your personal title policy should cover you for what is needed.  Oh, and keep in mind....we are doing this to AVOID delayed financing.  Delayed Financing would cause a whole series of issues (see the 2nd section of the original post) and those restrictions are the whole reason why we do this method.  We are doing this method so we can have a "rate and term" refinance (or a non-cash out refinance).  I hope this makes sense.

[Andrew Postell]

@Joseph Brown sure! What we focus on with this strategy is FILING A LIEN. You having your name on the property already is actually more helpful....but in case others are reading this, you can certainly have it in a LLC name and still use this strategy. Now, you will file your lien FROM your LLC.  So the lien that is filed on title is from the LLC, you are the borrower.  Does that make sense?  Just record your lien as usual and you should be good.  Oh, and I'll preface this with...you should be good with using a Fannie/Freddie loan, so make sure you are already prequalified BEFORE filing a lien.  Feel free to ask anything additional.  Thanks!