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!

[Ike Stephens]

Excellent write up! I asked this exact question in THIS THREAD but this post answered that question exactly and so much more.

Thanks a million @Andrew Postell!

[Cody L.]

this thread reminds me why I couldn’t run from 1-4 family investing fast enough :-)

[Luke Alvarado]

Andrew,

Thank you for the detailed description.  Getting ready to fund my first deal and this is great info.  

[Michael Kiley]

@Andrew Postell So if I want to BRRRR a 40k house that has an ARV of 100k, I borrow 75k from my LLC, file a mortgage, and I can refinance the 75k mortgage with conventional bank financing once the rehab is completed? But if I buy and rehab the house with my own money and don't file a mortgage, I'll need to wait 6 months to cash out refinance if I don't want to be limited to the lesser of the 2 amounts you mentioned earlier?

I was also wondering, is it beneficial to apply for loans in just my name so it doesn't limit the total number of loans my wife and I can have to 10? (If we both apply separately, we can have up to 20?) Or am I missing something here? Thanks for your reply!

[Andrew Postell]

@Michael Kiley you have it 100% correct.  If you didn't file the loan, you would be limited to $40k in the first 6 months.  That's leaving a lot on the table.  That's why this strategy is so important.

And if you are applying for Fannie/Freddie loans (which is what this strategy applies to) then they will require you to apply for the loans in your name.  You can do 10 in your name and 10 in your spouses name.  Assuming you both qualify separately of course.

Thanks for reading!

[Michael Kiley]

@Andrew Postell Thank you for taking time out of your day to answer my question. 

[Sean McCluskey]

Hi @Andrew Postell, thanks so much for this thread, it's a wonderful source of clarity and information!

I have a question - I live in California and thus would prefer to avoid paying the $800/year CA franchise board LLC tax. Do you know if it is possible to structure a transaction in the same way you've outlined, but using a Delaware Statutory Trust DST instead of an LLC?

[Andrew Postell]

@Sean McCluskey yes, some states do charge more than other states for their LLC's. I would guide that you should probably have a business entity for Schedule C purposes anyway, and that's also what's usually preferred to open business bank accounts, etc. So there are other reasons why a real estate person should have some type of business entity for working in real estate. BUT, to answer your question directly, yes, you can file a lien using any type of entity. I have even seen liens from people before. But since you can't lend money to yourself (in most scenarios) that's why I choose the LLC route since most investors already have one formed. Hope this helps in some way. Thanks!

[Alex Zokan]

@Andrew Postell Thanks for the very detailed breakdown. I'm curious how is income factored into this type of loan? Will they use the income from the property if its rented? If so is there a seasoning period on this? Since the property won't be owned for long that income will not show up on a tax return yet. 

[Kurt Petrich]

I'm trying to clear something up with the LLC refinancing option.

So when I buy the home in Cash, I can settle as normal and then the next day(s) I should go to the country courthouse to file the LLC deed for the loan and once that is successfully recorded I'll be able to refinance out?

I ask because I've read two different narratives:  

1) "file the deed for the loan at the county courthouse" and 

2)  "get the title company to file the lien" 

The second option sounds like it needs to be done with the title company at closing?  I'm confused.  Can I just file the deed at the courthouse after closing or do I need to make sure to give the Morgage Note to the escrow/title company pre-closing so they can file the deed from inception.

[Marc Tuckey]

@Andrew Postell

Great post. Lots of concise info here. I was wondering if I could accomplish the loan from the LLC post closing? I did not even know that was a possibility until I read your post. Is it as simple as filing a deed of trust or do you have to show loan docs and money transferring? Thanks

[Brook Rieman]

@Andrew Postell thank you so much for this post. Being new to this, the clear instructions are super helpful.

[Dain Cook]

Hi Andrew, Thank you for the post. I am looking to use a form of this strategy but a few barriers or unknowns exist and I was hoping you could clarify a few things for me. My "Investment Property" purchase will actually become my primary residence. Most of the deals are included in a forum post I created.

https://www.biggerpockets.com/forums/49/topics/639...

The 1st major unknown for me is the appraisal value. The current owner had it appraised for 240,000. The purchase price is 197,900.

If I were able to obtain short term financing (private money lender) to purchase the property @ 197,900 will it reset the appraised value from 240k back to 198k?

The next step in the scenario is to refinance with my bank, using 240k as the value? Because it will be my primary residence, I will need only 5% down or 95% LTV.

Is this a probable example?

[Johnny Sooc]

Thank you so much for posting this. Great info.

[Derrick Lloyd]

@Andrew Postell Thanks for the write-up, this is exactly the strategy I needed to find to fit my BRRR strategy! I have a good understanding of how it works but have a question on the transfer of funds.

I plan to use a HELOC on my primary residence to purchase and rehab. Instead of paying directly with the HELOC, I will loan myself the HELOC money from my own LLC. My question is, do I need to actually do a transfer of funds for this to be a valid transaction, i.e. transfer HELOC funds to LLC bank account, then transfer LLC loan money from bank account to seller (for purchase) and to myself (for rehab)? Or can I avoid these steps and simply transfer the money straight from the HELOC?

[Andrew Postell]

@Derrick Lloyd so for the loan itself, how the monies make it to the title company are inconsequential.   You could do either strategy really.  The important step is that a lien is filed.  I've even had people file that lien after closing.  The source of the funds is not important.  However, if you are looking to do those steps for accounting purposes....well, I may not be the right person to consult.  We aren't doing anything that is taxable but some people have pretty strict books and maybe transferring the funds to your business bank account might follow your accounting process.  Hope that helps!

[Joe Bruck]

My application at Aim loan for a delayed financing exception was denied because I bought the property from my property manager

which according to my lender is considered a non arms length transaction and according to Fannie Mae/Freddie mac guidelines 

such a transaction must only be arms length.  

[Andrew Postell]

@Joe Bruck I am very sorry that you ran into this.  I need to write an entire article on what I am about to tell you but you ran into something that the lending world calls an "OVERLAY".  An overlay is an extra rule that banks put ON TOP of Fannie/Freddie loans to make themselves more conservative on their lending.  I know, I know, the bank didn't TOLD you it was a Fannie/Freddie guideline...and that's how front line Loan Officers are trained to respond.  Chances are your Loan Officer doesn't even know what an overlay is.  And it's not their fault so don't take it out on them.  I was new once too and this is exactly how I was trained.  But overlays exist and there can be lots of them.  The rule that they referenced is not a Fannie/Freddie guideline.  Again, very sorry you had this happen but we've all been through it before.

For the most part, large banks are out for us as investors.  If they are publicly traded....just don't even try.  Too many overlays.  And that's why most investors work with small banks.  The smaller the bank the less chance of hefty overlays.

Now it's hard to know what questions to ask to find out what overlays banks have so I compiled a list that does help you find out if they can work with investors:

Questions for Lenders

1. When do you start using rental income to help me qualify? (the answer needs to be immediately)
2. How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
3. What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
4. Can I change title to my LLC?
5. Do you sell your mortgages?
6. What is your loan minimum?
7. Can you explain to me what your reserve requirements are?

Feel free to tag me with anything additional.  Good luck!

[Joe Bruck]

Originally posted by @Andrew Postell:

@Joe Bruck I am very sorry that you ran into this.  I need to write an entire article on what I am about to tell you but you ran into something that the lending world calls an "OVERLAY".  An overlay is an extra rule that banks put ON TOP of Fannie/Freddie loans to make themselves more conservative on their lending.  I know, I know, the bank didn't TOLD you it was a Fannie/Freddie guideline...and that's how front line Loan Officers are trained to respond.  Chances are your Loan Officer doesn't even know what an overlay is.  And it's not their fault so don't take it out on them.  I was new once too and this is exactly how I was trained.  But overlays exist and there can be lots of them.  The rule that they referenced is not a Fannie/Freddie guideline.  Again, very sorry you had this happen but we've all been through it before.

For the most part, large banks are out for us as investors.  If they are publicly traded....just don't even try.  Too many overlays.  And that's why most investors work with small banks.  The smaller the bank the less chance of hefty overlays.

Now it's hard to know what questions to ask to find out what overlays banks have so I compiled a list that does help you find out if they can work with investors:

Questions for Lenders

1. When do you start using rental income to help me qualify? (the answer needs to be immediately)
2. How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
3. What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
4. Can I change title to my LLC?
5. Do you sell your mortgages?
6. What is your loan minimum?
7. Can you explain to me what your reserve requirements are?

Feel free to tag me with anything additional.  Good luck!

 I disagree with you about on ''arms-length transaction'' overlay ,Fanniemae clearly states the following "requirement" 

The original purchase transaction was an arms-length transaction.

on there website ...https://www.fanniemae.com/content/guide/selling/b2/1.2/03.html#Delayed.20Financing.20Exception

[Andrew Postell]

@Joe Bruck the debate here is not that arms length transactions are required but rather if your relationship with your property manager would be considered an arms length transaction or not.  For example, if the person selling the property was related to you - that would be classified as a non-arms length transaction...and that would violate the terms of a delayed financing transaction (keep in mind this article demonstrates how to NOT be a delayed financing transaction). Also, if your property manager and you owned a company together - that would also be classified as a non-arms length transaction.  

The other scenario where arms length is required is on new construction properties.  And verbatim from the Fannie Mae guide: For the purchase of newly constructed properties, if the borrower has a relationship or business affiliation (any ownership interest, or employment) with the builder...

And that is the precise literal translation to what a non-arms length transaction would be. Maybe that does exist here?  So if you are employed by your property manager, or if your property manager is an employee of your company, that would be considered a non-arms length transaction.  Just DOING business with someone does not constitute a non-arms length transaction.  

Maybe your post was just another reason to actually do the things in this post (if you follow the steps it will NOT be a delayed financing transaction) and that would be a very good point to make.  I only mean here that it would be likely that you could have closed with another bank even under your circumstances.  I hope this didn't come out in any way but to help.  Thanks for contributing.

[Account Closed]

Hey Andrew, this is a great post! Very informative. I have some specific questions about my current situation. Will be sending you a message soon.

Originally posted by @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!

[Kristin Drumheller]

Is it legal for my chiropractic office to use our line of credit to fund a purchase of rental property? We constantly get offers for lines of credit but I always throw them away. This would be an easy way to get money but I'm not sure its legal. Is there a way for unrelated businesses to fund each other?

[Irina Belkofer]

Originally posted by @Kristin Drumheller:

Is it legal for my chiropractic office to use our line of credit to fund a purchase of rental property? We constantly get offers for lines of credit but I always throw them away. This would be an easy way to get money but I'm not sure its legal. Is there a way for unrelated businesses to fund each other?

Your office can make a loan to your RE company to buy a rental. Why is that illegal? Make it the same %% your office pays on the LOC and you won't have any extra reported income also

[Kristin Drumheller]

Thanks @Irina Belkofer. I just wasn't sure. The only LOC we've had was to open our office and for that particular bank we had to give reasons why we needed that money so it always pertained to the business the LOC was intended for. I wasn't sure if a LOC could be used as a loan to another business since its not related. Thanks for the insight, hope that makes sense!

[Joseph Holliway]

I am struggling to understand the LLC's loan on the property after the home was bought with cash.

Who do you go through to issue the paperwork on the loan?

Filing the deed; is that a warranty deed and a quit claim? 

I also wanted to confirm i read this correctly and the LLC can lend up to 75% of the property value on the initial loan, which would incorporate any potential rehab costs?