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]

@Allvin Dsouza then keep searching for a different lender.  Some lenders will carry "overlays" concerning ANYTHING investment property related transaction - and those lenders we don't work with.  We can't work with them.  But there are plenty of others that can.  I know one lender in Indiana that is good (feel free to PM me if you like) but you can also post in the Indiana forum.  There is usually good locals that follow that forum and there should be some good people who know lenders with no seasoning.  I did write a SEPERATE post on this topic that you can find HERE.  Hope all of that makes sense.  

[Abbie Bejrowski]

I am closing on a triplex today with cash and then putting a mortgage on the property. Check out InterFirst Morgage and Better Mortgage. They will do their best to match/beat others and both consider this type of transaction a cash out refi.

[Allvin Dsouza]

Thanks @Abbie Bejrowski

[Awet Hagos]

@Andrew Postell first off, best BP post of all time. 

Is it possible to do this strategy if the “all cash” portion is a short-term loan from one of these “cash offer loan lenders” (e.g. FlyHomes) and you’re listed on title and the property deed?

Then the second lien is filed at closing from your LLC. If I'm following correctly, when you go to refinance, the lender will essentially see two liens/loans and pay them both off?

[Andrew Postell]

@Abbie Bejrowski if a lender is considering this method "cash out" then that's not the right way to write a loan using this technique.  The entire purpose of this method is so that it's NOT considered a cash out.  Cash out limit on a duplex is 70% with Fannie/Freddie.  Doing this method would mean you could go up to 75% on a duplex.  That 5% difference is thousands of dollars on most properties.  That's the power of this method.  It provides thousands more back to us as investors.  Hit me up if you need help here but I would encourage you to NOT work with a lender that considers this method "cash out".

[Andrew Postell]

@Awet Hagos aha! Good catch there. And yes, we use that technique all the time with this strategy. You must, absolutely without question, file that 2nd lien at closing when doing it but if you do you can certainly combine a "1st lien" from a HML and a "2nd lien" from your LLC. Usually we want the HML to give permission and everyone we have used has been ok with it. Hope all of that makes sense.

[Alejandro F.]

@Andrew Postell, will this work as follows? (first three steps are different from the original post)

• You purchase home cash under your name
• You create an LLC
• Your LLC gives you a loan for the home
• You file the deed for that loan at the county courthouse
• 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.

[Andrew Postell]

@Alejandro F. at this time we almost have to have that LLC created and file the lien at closing when you purchase. Now, this is not a Fannie/Freddie requirement but lenders are really looking at that part closely. It is possible to find a lender that won't care if you file at closing or not....but 90% of them will need it at closing.

[Caroline Lewis]

What a helpful article. wish I had read this a year ago!

[Ohad Benjamin]

@Andrew Postell

I've heard about the LLC structure, but was also told that the legality of it is questionable. Have you done this personally or had helped a client do it?

[Andrew Postell]

@Ohad Benjamin we have been doing this method actively for many years.  The post itself is 4 years old at this point.  This is a completely legal thing to do. Lots of experience with it and I have done it on my own properties that I still own to this day.  

[Sohail Kiyani]

@Andrew Postell tku for the post.

I'm sorry if this has already been discussed.  If I purchase a duplex for $75K and do $25K rehab after loaning $100k from my llc to myself.  I then try to refi asap.  Lender gets an appraisal to payoff the 100K loan and appraisal is say $120K.  $120K x .70= $84K.  Would the lender go with the lower of 84K?  That wouldn't be enough to payoff the original $100K loan.  Am I missing something? tks  

[Andrew Postell]

@Sohail Kiyani just to cover this here as well, the lender would go off of the APPRAISED amount - so $100k. With this strategy you can currently go to 85% of ARV (if it's a single family home) so you could still get a loan of $102,000...so it would be close to get all your money back. But this method allows more flexibility as well. That's why it's such a good strategy. Hope all of this makes sense.

[Vince Liu]

@Andrew Postell Thank you! Super informative post! Quick question - for me, the Conventional Loan you mentioned in Section 2 is good enough for me - I purchased this property for $115K in Cash and it's currently valued at $130K. The lower of the 2 is 75% of the ARV ($130K) which is exactly what I'm looking for. I asked a couple of conventional lenders they all told me that I have to wait for 6 months. Should I just keep searching, or has the rules changed?

Thank you!

[Sam Bannister]

I understand that in order to qualify for delayed financing a family member cannot contribute. What if they were to give me a cash loan against another property I currently own outright? Would I just have to put it in writing? Or would that still disqualify me? 

[Andrew Postell]

@Vince Liu the rule absolutely has NOT changed.  It has been this way for many years.  The frustrating thing is that not every lender will do it though.  I can't tell what state you are in but it's likely I know someone there.  If you need some suggestions on a lender or two that can do this then just PM me and I can look through my contacts for someone that can help you.  Thanks!

[Andrew Postell]

@Sam Bannister yes, this whole article is about how to file a lien/loan at closing. It can be from your LLC or a family member. The structure is the exact same. Remember, we are AVOIDING delayed financing with this technique because all the rules are so screwy. So filing a lien from your family member is acceptable.

[Sam Bannister]

@Andrew Postell awesome. I get it now. Thank you! 

[Faye R.]

@Andrew Postell

This is brilliant. Thank you! Couple of questions. 

1) Can I just record the deed or does there need to be a paper trail? For example, does the lending llc need to wire closing costs? If the purchase price makes up 60% of the ARV and rehab is 10%, does the 10% also need to transfer from lending llcs bank account to the borrowing llcs account?

2) In order to meet 1033 requirements,  homestead the property, and get primary residence rates, I would like to buy in an llc and then transfer title to and refinance personally. Will this throw a wrench in things? 

[Andrew Postell]

@Faye R. thanks for posting. This post is several years old at this point but we have found that providing the paper trail allows for more lenders to go with this technique. So showing the loan on the HUD/Settlement Statement when you close is highly recommended.

Now, I'm not sure what "1033 requirements" you are referring to....did you mean a 1031 exchange?  Just let me know what you meant there and maybe I can help better but really we don't use this on primary homes.  Mainly because when buying a primary home you have 5% down, 3.5% down, 3% down, and 0% down options.  When we purchase investment properties the minimum is 15% down....so we are always trying to reduce that amount with creative methods. 

Anyway, I hope this helps in some way but feel free to post more if you need.  Certainly here to help.

[Faye R.]

Thanks for responding. Next time I’ll put it on the hud. This time I had to move fast and ended up only recording the note. 

My second question should have simply stated “will it cause problems if buyer/ borrower is llc but title subsequently changes to my name before refinance?”

(1033 is the same idea as a 1031 but significantly more flexible. It happens when you lose property involuntary, for example to wildfire.) 

[Seth Holmen]

@Andrew Postell Thank you for keeping this article and thread active. It's been very useful. I had a couple questions and apologies if you have answered these somewhere in the 17 pages of comments. I did my best to search them first. 

I made a little flow chart for my specific situation. I wanted to run this buy you and see if I'm understanding a few things correctly. 

I have the ability to make cash offers from 2 different sources. 1, being leveraging my personal equity and funds. 2, being borrowing money from a family loan.  

The first question is on the Option 1 of using an LLC hard money loan and traditional refinance. I'm assuming this only works if the property is 100% purchased through the LLC? If it was 50% with a Heloc and 50% with hard money then the refinance would only refund the hard money loan that filed the deed correct? Could the Heloc somehow contribute to the LLC and loan the money back? It seems like too many complicated steps that gets into a tax nightmare if not 100% with the LLC. Is there a second creative way I'm not seeing?

The second question is on Option 2. Can the LLC lend money for 50% of the purchase price and be considered "verified funds"? These would be funds that do not have my name attached and have not been sitting in my account for 3+ months.

[Andrew Postell]

@Seth Holmen thanks for posting.  Nice graphic.  Hopefully that didn't take to long to create but I think I'm tracking you.

Basically the outline of this method is if you are purchasing a property with cash. The cash can come from a HELOC but it would first be put into the LLC bank account type of thing. That way the LLC is still the lender. And to be clear, this property is not purchased by the LLC. The property is still purchased by you, but the LLC is the lender.

Now if you are using a combination of things this same strategy/concept can still be used but you'll need to file a 2nd lien for your 2nd source of money. So if hard money was your first source...and your LLC was your second source, then the HML would have a 1st lien and your LLC would be a 2nd lien. Same if that second source came from a somewhere else like a family member. Keep in mind that this is a Fannie/Freddie loan type we are speaking to. So their rules for 2nd liens do require that they are filed at the time of closing and reflected on the HUD. No wiggle room on the 2nd lien at all here. Must be filed at closing. Basically this is referred to as a "purchase money 2nd lien"...but with it you can refinance right away, no waiting.

Hope all of that makes sense.

[Seth Holmen]

Originally posted by @Andrew Postell:

@Seth Holmen thanks for posting.  Nice graphic.  Hopefully that didn't take to long to create but I think I'm tracking you.

Basically the outline of this method is if you are purchasing a property with cash. The cash can come from a HELOC but it would first be put into the LLC bank account type of thing. That way the LLC is still the lender. And to be clear, this property is not purchased by the LLC. The property is still purchased by you, but the LLC is the lender.

Now if you are using a combination of things this same strategy/concept can still be used but you'll need to file a 2nd lien for your 2nd source of money. So if hard money was your first source...and your LLC was your second source, then the HML would have a 1st lien and your LLC would be a 2nd lien. Same if that second source came from a somewhere else like a family member. Keep in mind that this is a Fannie/Freddie loan type we are speaking to. So their rules for 2nd liens do require that they are filed at the time of closing and reflected on the HUD. No wiggle room on the 2nd lien at all here. Must be filed at closing. Basically this is referred to as a "purchase money 2nd lien"...but with it you can refinance right away, no waiting.

Hope all of that makes sense.

Thank you for the clarification. Has there been a further conversation around the LLC lending that you can link me to? Any local CPA or Attorneys in Illinois on here? I'm curious about the movement of funds from a Heloc to and LLC and then back. Or more so if I use extended family as my funding source, how they move funds in and out of an LLC. There must be some tax implications to be aware of here. Does my name need to be disassociated with the LLC for the underwriters not to get concerned?

[Andrew Postell]

@Seth Holmen this is such a specific thing that I'm not even aware of anyone else that teaches this method.  Being a real estate investors is only like 2% of the population.  So if you are an investor, and you are using this one specific strategy, and this and that...it just becomes rarer and rarer of a scenario.  So I'm not sure of anyone else that knows this stuff at all.  Let me give some general statements here that might help with what you are asking:

• When the LLC lends to me, we use 0% interest rate so there is no income generated. No income means no taxes to pay.
• If I used a C-Corp or S-Corp to lend to me, then there are specific rules that require those entities to charge a minimum amount of interest. So the rules are different for different entities. Which is why we use the LLC route when we do this method.
• If a family member or other party lends to me, they pay taxes on the income they make from that loan. Essentially the amount of interest. Formally, they should also provide a 1098 form to me showing the amount of interest I paid on a loan. That interest is tax deductible to me as a borrower. For the lender, it is tax as interest by normal methods.
• If you deposit any personal funds into your business it's treated just like any normal "cash injection" that you provide.  This is how most people document deposits into their company from personal funds.
• And the underwriters 100% know that you own the lender.  That's inconsequential to this.  It's not "illegal" for the CEO of Bank of America to get a loan from Bank of America.  It's the same scenario but just on a smaller scale.  Remember, we are FOLLOWING Fannie/Freddie guidelines here.  So as long as we follow the rules, we're ok using that loan type when using this method.

I hope this all helps.  But certainly here if you want to just call me directly to talk this through.  Thanks again for posting!