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 Thank you so much!

[Joseph Brown]

Is there a cashout refinance option to the method you provided?

[Andrew Postell]

@Joseph Brown the whole point of this strategy is to AVOID cash out refinances.  As mentioned in section 1 and 2 of the original post cash out loans have a TON of restrictions.  This strategy is to avoid those restrictions.

[Sean McCluskey]

@Andrew Postell @Alexander Felice I have another question. Should I pay my escrow company $250 to draft an Escrow agreement to hold and disperse rehab funds? They mentioned that an alternative option is I can have another party hold the money and be listed on the closing statement as Payee.

My LLC will be the lender - can I just have my LLC be the payee of the escrow rehab cash as well?

Thanks!

[Andrew Postell]

@Sean McCluskey if you file a lien from your LLC you do not need to list your rehab on the HUD. This strategy is to avoid the rules of delayed financing entirely.

[Paige Yu]

Hi Andrew! 
Thank you so much for sharing this great knowledge! This is extremely helpful to me.
I have a question - is there a lower cap to the appraised value? For example, if I bought a property for $60k cash, my LLC put a lien on it, and the appraisal value comes out to be $70k or $80k -

1) is this situation still eligible for a refinance ? 
2) if yes, will the cashback amount be 75%*$70k , or 75%*$80k (if appraisal value is $80k) ? 

Thanks so much Andrew!

Best,
Paige

[Andrew Postell]

@Paige Yu some lenders do have a loan minimum but Fannie Mae and Freddie Mac do not. I would certainly make that one of the questions you ask lenders as you interview them. Keep in mind this is NOT a cash out loan, you are refinancing your existing lien - that is called a standard "rate and term" refinance (meaning, you are changing the "rate and term" of the existing lien). With this strategy you can refinance 75%, 80%, and even 85% of the ARV on the property. The full ARV. So if the ARV was $80k....and you wanted to keep you loan at 80%....then that would be $64,000. So filing a lien for $60k seems about right since that will give you some room to roll in closing costs. Hope all of this makes sense.

[Paige Yu]

Thank you so much @Andrew Postell! Your answer is so helpful! 

Can I ask a couple follow-up questions - 

• Can the lien be filed at any time? I closed on my property a month ago and my LLC is not registered yet, and some rehabs are being done, will it work if I register my LLC and file the lien now?
• Is there a best timing to file the lien? If the lien amount is to include the rehab cost too, as I learned from previous discussion in this post, would it be best if I file the lien after rehab is done or file a lien on estimated rehab cost before rehab is actually done? 
• If the appraisal value for the property came out to be a lot higher, for example $110k for a property I paid $60k for, what would be a better loan option - "rate and term" refinance or wait for 6 months to get a Fannie Freddie loan? 

Thanks again!!

Paige

[Andrew Postell]

@Paige Yu yeah, no problem.  Ask away! Here's the answers:

• Can lien be filed at any time? - Yes, Fannie/Freddie have no restrictions on when the lien needs to be filed.  You can certainly file it after closing.
• Is there a "best" time to file the lien? - Yes, the best time to file is "at closing". The title company is already drafting documents for the closing...and they are already filing documents with the county.  AND you are already signing things at closing too.  So it's just easier to do it at closing.
• What if the appraisal came in higher? (and I'll even add lower too) - And this is common.  We might estimate the value to be $100,000...but what if it comes in at $99,000?  Or $101,000?  One of the things you don't see as a consumer is that lenders talk to each other during a loan.  Since we don't know if you have taken a draw (which makes the balance higher) or paid down the loan....lenders will call each other and ask "Hey, what's the official PAYOFF to this loan"?  The payoff adds in all the interest, fees, etc. that might be there so that the lien is paid off entirely to provide clear title to the next loan.  So you will WAIT until the appraisal comes in on your property to provide the payoff.  This helps the refinance process.  Because what if you had to bring money to closing because your payoff was higher than the value?  Well, you would be bringing your own money to pay back your own loan.  It's just redundant.  So to keep it simple, you will provide the payoff AFTER the appraisal comes in.  Hope all of that makes sense.

Feel free to ask anything additional.  Thanks!

[Sean McCluskey]

@Andrew Postell I have another question - do I need to make monthly mortgage payments to my LLC, in order for my future lender to refinance the loan?

I'm guessing the answer would be no, I just need to provide the filed-lien payoff amount when the future lender requests it?

Thanks!!

[Andrew Postell]

@Sean McCluskey you are correct - you do NOT have to make payments.  This is not a requirement from Fannie/Freddie to refinance an existing mortgage.  I encourage everyone to make their liens 0%, 12 month terms, no monthly payments.  Thanks!

[Richard Phan]

I'm just beginning to learn all these financing options to decide how I want to purchase my first rental. This method seems to make a lot of sense and extremely effective. Why have I not heard of more investors using this method? Just curious.

Is it basically creating an LLC. Using my own funds to deposit to the LLC (Is this step necessary?)

Buy a property with cash, using the LLC to file a lien on the property so you are getting a loan from the LLC.

Refinance, the lender pays the LLC and you essentially get your funds back?

Im really interested in this method for my first rental property. Has any done this and can go into some of the steps in more detail?

[David de Luna]

Yeah, but I dispense with the step of actually depositing the funds into the LLC account unless they are actually already there. Just not necessary - escrow doesn't care. Most of the time, because I am not always sure who I'll use to refi my money back out, I buy in my own name and quit claim it to my LLC if my refi lender wants that. When I receive my final firm loan offer, I use that amount to write my LLC a deed of trust that I file prior to close. No need to bother with writing a mortgage agreement. No lender has ever had a problem with the fact that it's just a lien without payment/rate or term. This way the rate and term (not a cash-out cuz it's a more expensive loan) payoff is guaranteed to get me all I want from the deal (to the limit of the LTV). Either way, afterward, I QC it to the LLC after refi. Easy-peasy because I learned it from @Andrew Postell

[John Acheson]

I would setup a nonprofit with non family board members

donate the asset to the board for a tax deduction

NP pays no property taxes, income taxes going forward

donor/investor retires and become Executive Director

and draws a salary for as long as the asset produces

at the same time helping the public with affordable housing

getting support from planning, politicians, taxes, grants, etc.

[Richard Phan]

Is this method a commonly used method by investors? It makes too much sense imo for it not to be used, yet I haven't really heard this method being used from any of the investors I've talked with. 

[Andrew Postell]

@Richard Phan one of the benefits to being on Bigger Pockets is that you get to see strategies like this.  As far as I know, I am the only person in the country that teaches this method.

[Richard Phan]

@Andrew Postell

Im going to bring this up to my agent and see what she thinks. Im planning on buying a rehab property with cash and this method makes so much sense. Just kinda surprised I don't see this floating around a lot more. Thanks Andrew!

[R Belcher]

I know this post is older but still very informative especially considering the BRRRR method LLC refinance stipulations. Thanks

[Nikki Closser]

@Andrew Postell

This is an absolutely incredible thread! THANK YOU for your patience and time spent here answering questions. I see that you are a lender in TX -- totally wish you were in my state!

If you don't mind, I have a few more questions to add. I'm definitely a newbie, so please bear with me :)

My questions have to do with the actual steps you list in section 3:

• 1. You create an LLC - all set
• 2. You buy a home - Just for the purpose of what I need to do when, this step is basically finding a house and getting an offer accepted? And then I pay with a cashiers check or wire on the closing day?  Please don't laugh -- I've never bought a house cash, so I'm being dead serious :) 
• 3. Your LLC gives you a loan for the home -- What are the steps for this? I read that we technically don't have to transfer any money from me to LLC or vice versa. But, is this the "writing a loan note" step? If so, sounds like I can google a loan note template and use that? And write it for 0% interest, ballooning at 12 months, but then sign both as borrower and lender?! That seems like a red flag? Are there any other steps other than this? When does filing the lien happen? Or is filing the deed and lien the same thing?
• 4. You file the deed for that loan at the county courthouse -- I think I read that this can also be done by the title company at closing? 
• 5. You use the money from the LLC to buy and fix up the property 
• 6. Once the property is completed, your conventional lender comes to refinance the loan -- Get a preapproval first! Is this something I give them my projected numbers for? Like ARV and rental income?
• 7. Your conventional lender runs title and sees there is a loan 
• 8. 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. -- Cash the check to my LLC and then transfer the money back to my own account. Okay, so this is where I get confused about tax issues. Won't my CPA see this as income? Although, I'm technically not making any money since I'm not paying/collecting any interest?

One last question. Does my LLC have to be related to real estate or can it be from a totally unrelated business I own?

Thank you again so much!

[Andrew Postell]

@Nikki Closser certainly willing to answer any questions and I'll answer these one at a time here in case anyone else is researching this subject:

• Buying the Property - you take your funds to the title company.  Wiring the money in or cashier's check are the normal methods.
• Filing the Lien - some states differ in the paperwork for this step.  In Texas, we use a "Deed of Trust".  Many other states use that same form.  A local title company can certainly help us file whatever is needed by the state you are buying in and most will even draft the document for you for a small fee.  Many people have just googled the document as well.  There are many you can find free of charge.
• PreApproval - I would ABSOLUTELY recommend for everyone to get preapproved.  This will tell you if your refinance step can accommodate this strategy.
• Refinancing - when you refinance a loan you are not earning any income.  Meaning, you put $100,000 in the property, the lien is $100,000....so no income generated.  Your company might earn income on a loan if it charged an interest rate.  But that's why we encourage 0%. No income means no taxes.  Also, when you do refinance you can go up to 85% now.  When I first wrote this post the rules were a little different.
• Business Loan - Any business can lend money.  This is a normal procedure and the business type does not officially matter for this strategy.  A layer or accountant might encourage you to have a separate business if you start doing this on a regular basis but for the refinance step it does not matter.

Hope this helps!

[Shawn Stone]

Thanks for the article, Andrew -- very clear on how to do this with a cash-purchased investment. Question for you (more of a memory-refresher, perhaps): If we purchase a property with hard money, enough to cover the purchase and part/all of the rehab, and take a loan from the LLC, as you covered here, to cover whatever out-of-pocket costs we might still incur, would we be able to refinance both the hard money loan and the secondary loan from the LLC?

Thanks in advance for your answer to this (or a link to where you/someone answered it elsewhere)!

~ Shawn

[Andrew Postell]

@Shawn Stone yes, but you would need to file the 2nd lien at closing, when you purchased the property.  Hope that makes sense.

[Jim Francis]

@Andrew Postell just doing some research on Delayed Funding and ran across this post. Just wanted to make sure that I'm getting this right...

1. Create a Mortgage and Note from LLC to self

2. Record Mortgage and Deed and County

3. Rehab Property

4. Find Lender that will refinance at 75% LTV in less than 6mths (Portfolio or CU)

This allows a no drama 75% Refi based on Appraisal...

[Timothy Visio]

Originally posted by @Adam Drummond:

@Andrew Postell

i just recently bought a rental for 32k without a loan, and want to cash out.  i was told by several local lenders that I need to wait 6 months before they can do a cash out refi.  i told them that i only looked to get my purchase price amount back from the cash out refi.  They still said i needed to wait 6 months.  I will continue shopping around this coming week.  Any idea what rate i can expect on small cash out loan, length of loan, etc?  I appreciate the help.

Thanks,

Adam

There's private lenders that have no seasoning period. The problem you'll run into is the loan amount. Many lenders don't lend less than $75k.

[Andrew Postell]

@Jim Francis I wanted to make sure to reply here in case others were researching this topic as well.  Here's the responses based on what you posted:

1. Create a Mortgage and Note from LLC to self - Correct!

2. Record Mortgage and Deed and County - Correct!

3. Rehab Property - Correct!

4. Find Lender that will refinance at 75% LTV in less than 6mths (Portfolio or CU) - Incorrect.  This strategy is for Fannie/Freddie loans, so conventional lending.  A portfolio loan may not have ANY of the rules that Fannie/Freddie loans have.  They may not have any seasoning or any "delayed financing" exceptions.  If you cannot qualify for Fannie/Freddie loans...and only use portfolio loans...then none of this may even apply.  So the correct method here is to be PREQUALIFIED before you do anything.  That way you know what your loan terms are in your REFINANCE step.  I hope that makes sense.

Oh, and this post is from 2 years ago so now you can refinance up to 85% with Fannie/Freddie money using this strategy.