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!

[Haley McLaughlin]

Can you go over this example with me to make sure I'm on the right path. 

Purchase a SFH with cash (from HELOC) $114,000, minimal repairs around $3000 if that.

ARV: $152,000

I have a bank that will do "delayed financing". 80% LTV up to $114,000+closing costs.

30 year fixed at 5% or 15 year at 4.1%

I should be able to get all my money back if it appraises correctly. However, it doesn't look like this property will cash flow after the "financing". Rents will be about $1200-1250. 

[Andrew Postell]

@Haley McLaughlin thanks for posting here.  You are asking about several things so let me try to answer each one:

1. Delayed Financing - If you have a lender that will do 80% on a delayed financing transaction....I would be very cautious going forward with that lender. Using Fannie/Freddie lending (which is what this whole post is about) will limit a delayed financing to 75% of the ARV (as mentioned in the first section). So if your current lender is saying they can go up to 80% with Fannie/Freddie, then they have already gotten something wrong. In the lending world, this is pretty easy stuff. So if they are already getting things wrong, tread very carefully with that lender. It is likely that they will get other things wrong too. Might be worth interviewing other lenders that know these rules as any misstep could cost you a bunch of money.

2. Cash Flow - on a 15 year loan no one can cash flow.  That's why we would never choose that as an option.  If you do choose a 15 year loan, eventually you won't qualify for ANY loan type at all.  This is another reason why I would strongly recommend examining another lender.  Someone can't be showing me loan options that will hurt me as I grow.  On your 30 year option, you should still cash flow.  Now, I can't see your taxes and insurance....but let's assume for a moment that you DON'T cash flow even in that scenario.  That's just a 1 year look.  Years 2, 3, 4, and 5 you will be increasing rents and you will be cash flowing then.  In some markets rental amounts are lagging behind values right now.  But rental income is our hedge against inflation - we get to increase it each year (just like inflation).  Look at it from a long term perspective and it should work a little better.

Hope all of this makes sense.  Thanks!

[Haley McLaughlin]

Quote from @Andrew Postell:

@Haley McLaughlin thanks for posting here.  You are asking about several things so let me try to answer each one:

1. Delayed Financing - If you have a lender that will do 80% on a delayed financing transaction....I would be very cautious going forward with that lender. Using Fannie/Freddie lending (which is what this whole post is about) will limit a delayed financing to 75% of the ARV (as mentioned in the first section). So if your current lender is saying they can go up to 80% with Fannie/Freddie, then they have already gotten something wrong. In the lending world, this is pretty easy stuff. So if they are already getting things wrong, tread very carefully with that lender. It is likely that they will get other things wrong too. Might be worth interviewing other lenders that know these rules as any misstep could cost you a bunch of money.

2. Cash Flow - on a 15 year loan no one can cash flow.  That's why we would never choose that as an option.  If you do choose a 15 year loan, eventually you won't qualify for ANY loan type at all.  This is another reason why I would strongly recommend examining another lender.  Someone can't be showing me loan options that will hurt me as I grow.  On your 30 year option, you should still cash flow.  Now, I can't see your taxes and insurance....but let's assume for a moment that you DON'T cash flow even in that scenario.  That's just a 1 year look.  Years 2, 3, 4, and 5 you will be increasing rents and you will be cash flowing then.  In some markets rental amounts are lagging behind values right now.  But rental income is our hedge against inflation - we get to increase it each year (just like inflation).  Look at it from a long term perspective and it should work a little better.

Hope all of this makes sense.  Thanks!

 Yes, that does make sense. Thank you! I guess they are doing "delayed financing" but as a portfolio loan? Is that possible or does it have to be Fannie/Freddie to count as delayed financing. I will keep searching other lenders and their options. Looking for 75% and 30 year fixed. 

Taxes will be $114/mo and insurance at $66/mo. 

[Andrew Postell]

@Haley McLaughlin yeah, maybe they were using it with a different loan type but that seems like a conventional rate right now. Oh, and for your full PITI payment on a 30 year fixed would be $792 per month. So if I am calculating my cash flow: $1250 x 80% = $1000 - $792 = $208 of cash flow. That's how I would estimate it.

[Dee Payne]

This is great

[Jerry Benson]

Hey Andrew, I know this post is old, but it appears to have aged very well.  Very informative and I am trying to understand the structure of all of it.  I understand an investor has to purchase a home for cash, meeting the criteria below:

* Arms-length transaction, no relationship between buyer and seller.

* Purchased as individual, land trust, inter-vivos trust, LLC or Partnership 100% owned by buyer.

* Original purchase amount is documented by a closing disclosure or settlement statement.

* Purchase is recorded.

* Source of funds are documented and traceable, no mattress money. (Track dollar for dollar)

What isn't clear to me is the part where you have the LLC put a lien on the property. Thus making this a refinance and not a cash out, which is awesome. How does that get around FNMA guidelines: "The preliminary title search or report must confirm that there are no existing liens on the subject property."

I started working as a MLO 1.5 years ago and am talking to my manager about how we can add this to our product list. We offer non-QM products anyway, so why not add another to increase our buyer pool.  In addition, I have an investor client that is buying homes for cash and wants her money back fast.  She has been told by many lenders it is impossible to do and she has to wait 6 months, but that isn't correct. I just can't fully explain how to structure it, so my client can accomplish what she wants. Then explaining it in detail to my superiors who have been in the business for 25+ years has it's own challenges.  So any clarity you can provide so I can help my client would be great. Thanks.

[William Manning]

Quote from @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!

#3 scenario

Yet again, you have an solution to a problem that inexperienced new investors like me don't know how to get around and would've spent hours and hours along with thousands trying to correct.

From someone that hasn't even purchased their first investment property, thank you. That's 2 preemptive future FUBARs that you've prevented.

[William Manning]

Quote from @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.

 @Andrew Postell if this has already been answered, then my apologies.

[Andrew Postell]

@William Manning thanks for all the kind words.  Greatly appreciated!

[Andrew Postell]

@William Manning oh, and usually the lender does not sign the mortgage note.  Usually it's just the borrower.  Likewise, lenders usually don't see the note either.  All lenders see is the lien on title/deed.  They will get a "Loan Payoff" from the lender....but it would be very unusual for a lender to ask to see the formal note itself.  Hope all of that makes sense.

[William Manning]

Quote from @Andrew Postell:

@William Manning oh, and usually the lender does not sign the mortgage note.  Usually it's just the borrower. 

Thank you again. 

[Colten Mounce]

This is incredible information.  We are just starting out and looking for a way to mitigate the seasoning period.  We are heavy on cash and want to use that to scale.  This seems like a great way to do this with the right analysis of the property cost and rehab costs. 

[Andrew Postell]

@Colten Mounce thanks for the kind words.  We have been using this strategy for many years and it has certainly helped out many people.

[Jason Pearson]

@Andrew 

@Andrew Postell Do you (or can you publicly on the forum) recommend any lenders that would be able to refinance on a property that had the Lien placed (from my LLC following the strategy) a few weeks after closing? Feel free to PM if you cannot publicly recommend a lender.

Thanks

[Andrew Postell]

@Jason Pearson thanks for the question.  Obviously, I might be a little biased here but I always recommend to get plugged into your local Real Estate Investor groups.  There are many that meet across the country.  Some advertise in the Bigger Pockets marketplace.  Meetup.com is a good site.  Even facebook will have a few.  And while I always appreciate someone trying to earn business - you need to take a fellow investors recommendation.  Meaning, how do you know if anybody is any good unless you start working with them?  And by the time you figure out if they are any good or not it might be too late to switch!  So another investor has gone through it already.  They already know what it's like.  And while not foolproof, it should help limit some of the pain that goes into finding someone new.  I will PM you of course but that's what I always recommend.  Thanks again!

[Marc Stevenson]

@Andrew Postell  Such a great article.  Thanks for sharing!

[Caitlin Faulk]

@Andrew Postell Thank you for this valuable article. As well as your detailed responses to the many posts. Can you point me towards a lender, licensed in Florida, who has experience facilitating this method? I’d like to use this method on my upcoming deal.

[Adrian Wooten]

I was told that you could get the rehab money back as well if you put the rehab costs on the HUD and prepay at closing. I think it's called Delayed Financing, have you heard of this?

[Andrew Postell]

@Adrian Wooten delayed financing is as described in section 2 of this article:

• 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”…etc, etc.

That is describing what delayed financing is.

What you are describing is actually listing the repair costs on the HUD as a line item that has been paid. Meaning, you paid your contractor at closing....without them doing any work. That's a REALLY big leap of faith in a contractor. Now, even in that scenario you are still limited to 75% of the ARV of the property with "cash out" pricing. With this technique, you can go to 80% currently (and 85% in a more "normal" economy). So even if you are the contractor, and you pay yourself, you still can't get as much money by showing the paid costs on the HUD vs doing this technique.

Hope all of that makes sense.

[Andrew Postell]

@Caitlin Faulk I think I can.

[Ikenna Okoye]

@Andrew Postell Hey thanks for this great info firstly! Questions I have:

1. This would require you to purchase the investment property in your personal name correct? Which means you would get the HML in your LLC name?

2. When you go to refi with a conventional lender, will they allow you to start the process before the 6 month period? 

[Andrew Postell]

@Ikenna Okoye you don't have to purchase the property in your personal name to work this method. However, the lending LLC must be a different LLC than the owning entity. So to own it in an LLC, you would need to have a 2nd LLC.

And this whole process is to not wait 6 months.  That's the whole point of this.  You can refinance day 1.  No waiting.

[Thomas B.]

@Andrew Postell Do you have to have an LLC or can this be done with a Sole Proprietorship with a separate business account as well? Can this strategy be used after the property has already been purchased?

I bought my 1st investment property in my name back in May, using all cash offer from a HELOC on my primary residence, and financed the renovation with a 401K Loan. Now that I am trying to refinance, all the lenders want to treat it as a cash-out loan with terms inferior to their conventional rate & term refinance. The 6-month seasoning is a non-issue since that time is almost up for me now.

[Andrew Postell]

@Thomas B. very sorry, but you can't go back in time and change it for this strategy.  You'll need to do this on the next one.  

As far as the "Sole Proprietorship" goes...most banks require a EIN to open a business bank account. Not sure how you solved that without forming a company...you might already have a company formed? But if not, you would need to have a LLC created to implement this strategy. You are the buyer, your LLC is the lender...just like if you were a lender who lent money to other people. This is a technique that very wealthy people use that own their own companies and pay people a lot of money to know about these things. We are just sharing it here openly. To use this correctly, a LLC should be formed.

Hope all of that makes sense. 

[Caitlin Faulk]

@Andrew Postell

Hoping this is still relevant, planning to implement on the next deal. Thought I had a grasp on it, then noticed (around page 12,lol) a few updates to the strategy. 

1. Now recommended, funds actually transfer from LLC account

2. Rehab amount listed on HUD and kept in escrow (but held back)? Can you further explain why this is necessary?

3. Note and lien filed by LLC at 0% interest, 12 month term, balloon payment = purchase+rehab

Wondering if I missed any other relevant changes or updates to the original post?

Does the LTV increase if the LLC is in a different name than the borrower? Example wife, LLC/ husband, borrower.

Thank you for taking the time over all these years to continue to share this strategy.