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]

@Eric James lots of lenders say they won't do a lot of what we do as investors - "assignments are illegal"...."you can't do subject to transactions"....."no putting your LLC on title"....."you have to be on title for 12 months to refinance"...."no double-closes"...and on and on and on.  This post is to just highlight what Fannie Mae and Freddie Mac say.  We still need to work with a lender that is investor friendly.  Is it possible a lender won't do any of this?  Sure.  If that occurs... just go to a different lender.  Or better yet, lean on other investors to tell you which lenders are investor friendly.  That's the heart of Bigger Pockets.  There's probably someone in your state that already has a good referral for you in this regard.

[Tristan Colborg]

Originally posted by @Andrew Postell:

@Tristan Colborg below is a screenshot of part of the form where it speaks to the "rental income" only.  I removed the addresses but this is the form you need to get the rental value, meaning no 2 months of rents received needed.  This along with the lease is all that is required....now your lender could have an "overlay" to all of this but this is all that Fannie/Freddie require

 I did reach out back to the lender on this Andrew I sent you a PM with his response just don't want to put to much info here. 

[Don Pham]

@Andrew Postell I think I just came across a deal that'll be my first attempt at this--so glad I came across it first!

[Joseph Martin]

Quick question: you say to “file the deed for that loan at the court house.” Do you mean quit claim deed the property to the LLC?

recently we bought a 7-unit for cash and I want to do exactly what your saying. I took title in my personal name, but wanted to quit claim to my LLC.

can I do this you describe here?

thanks!

Originally posted by @Andrew Postell:

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! 

[Ron Brady]

@Joseph Martin - I'm not as expert at this. @Andrew Postell is.  This said, I understand that this process is designed exclusively for 1-4 unit properties.  Thus, for the 7-unit you ask about here, this would not be applicable.  I think early in this thread there are others who ask about units that exceed 4 and that this was the answer.  Good luck to you.

[Andrew Postell]

@Joseph Martin this post is for Fannie/Freddie lending on residential properties.  You won't face those 2 first sections of challenges with commercial loans.  Anything that is 5 units or more is considered commercial. (I know we spoke on the phone but I thought I would answer in case anyone else was researching this topic).  Thanks!

[Josh Norell]

Originally posted by @Tristan Colborg:

@Andrew Postell I recently started trying to finish the Rate/Term refinance and a property that I tried this strategy on and ran into a couple obstacles I thought I would share.

I filed a mortgage on the property with me as the mortgagor and the LLC as the mortgagee, just like you talk about in this forum. However, when I set up property management the rent payments go into my business (same LLC) account. I was told that underwriters right now are not just taking signed leases but need to see actual rental deposits on bank statements, otherwise they can't count rental income.

Additionally I was told that they can only count rental payment towards covering PITI but not the excess.

The lender I am working with also said that underwriters may ask to show payments have been made to the LLC as per terms of the mortgage.

it is looking like it may be harder to pull this off with out having everything set up perfectly. I may just need to file a satisfaction of mortgage and just do the cash out refinance at 70%LTV on my 3 unit versus the 75% this strategy was going to allow.

Tristan, were you successful with your Rate/Term refi using this strategy?

I'm not clear on how who owns the property, and who has the lien in your situation. Are you saying that the LLC is on title, and you personally put a lien on the property? This is what it sounds like from your post. But why would you do this? This post is regarding getting Fannie/Freddie financing, and it's my understanding that freddie/fannie will not issue loans in an LLC name.

[Josh Norell]

@Andrew Postell you mentioned in another post about having a 2nd lien position noted on the settlement statement at closing. Is this necessary or recommended for a 1st lien position also?

If the loan is not mentioned on the settlement statement, I would think the bank may raise an eyebrow when you go to refi.

[Nicholas Q.]

@Andrew Postell Do I need to actually transfer the money from my LLC to my personal account when filing the lien and deed? I have enough cash to purchase the property at closing. Then, after closing I was going to process the note and lien for the purchase price + rehab costs from my LLC. However, I was planning to use 0% credit cards for the rehab so I won't be able to actually transfer the money when the lien is filed. I am not sure if this make sense, but hoping you can reassure me. Thanks!

[G Calendar]

@Nicholas Q. No. Stop overthinking it. Make the note. File it with the county. Done.

[Jessica M Stiles]

@Andrew Postell

As everyone has said, thank you so much for this thread! It has been so helpful!

If you are able to answer, I wanted to throw my current situation your way to be sure I am understanding/setting this up correct for the future. Thanks in advance!

The Plan:

My dad is funding cash property purchases and rehab purchases. I am running the reno, getting the renters in and so on. The goal is for him to assist me in having several rentals, over time. We need to decide on our consistent strategy and think this thread may have lead us to it.

-My dad has an LLC specifically setup for what we are doing. He loans me money/writes me a mortgage with the terms you spoke about (12 month payback, 0% etc) at 75%-85% of the forecasted ARV from this LLC.

-I use the above as my loan and purchase the property in my name.

-I finish the renovations, get a lease signed (or not, just depends) and get a conventional mortgage in my name on the property. The bank I use for my refinance conventional loan then pays back my dads llc 75-85% of the arv.

Is that correct?

Additional questions about the above example..

-Would you recommend he has a llc he lends from that is in his name? Does it matter if the llc is in my name or his? Or-- what if he and I were on a llc together? Thinking through tax things as well for him on this.

-Assuming the ARV % the bank is paying my dads llc back on is the appraisal the bank, themselves called for, I am in essence guessing on ARV that I am basing the start of this process off of for each property? I am comfortable estimating, but just confirming my thought process here.

-When I technically purchase the property at first, my dad/the llc is wiring the title company the money, correct? I really won't ever have to touch it? 

The Last Scenerio:

-We are currently rehabing a house right now. He paid cash, title is in his name. He has put money in a bank account we are both on so I can do the rehab. What would be our best strategy to get this house in my name? (We should have done it from the start we now know!) And, do we need to wait 6 months for this one since we already have it and need to transfer it to me?

I hope that all makes sense! We are just looking for the best option to get started properly!

Thanks again!!

[Charles Campbell]

Hey,

Great post!  I’m new at this.  I’m educating myself, saving up money and keeping an eye on the market. I plan on purchasing with cash. 

Would this apply to using the BRRRR method in Canada? I don't believe we can get LLC?

thanks

[Charles Campbell]

Hey,

Great post!  I’m new at this.  I’m educating myself, saving up money and keeping an eye on the market. I plan on purchasing with cash. 

Would this apply to using the BRRRR method in Canada? I don't believe we can get LLC?

thanks

[Don Pham]

Originally posted by @Jessica M Stiles:

The Last Scenerio:

-We are currently rehabing a house right now. He paid cash, title is in his name. He has put money in a bank account we are both on so I can do the rehab. What would be our best strategy to get this house in my name? (We should have done it from the start we now know!) And, do we need to wait 6 months for this one since we already have it and need to transfer it to me?

I hope that all makes sense! We are just looking for the best option to get started properly!

Thanks again!!

If you and your dad are partnering for the long term, you guys may want to consider putting it into a revocable grantor trust where you guys can amend the beneficial interest where needed. If you are considering this route, seek legal counseling, as I'm just a guy on the internet that has watched a bunch of YouTube videos by Clint Coons :)

[Charles Campbell]

Hey,

Great post!  I’m new at this.  I’m educating myself, saving up money and keeping an eye on the market. I plan on purchasing with cash. 

Would this apply to using the BRRRR method in Canada? I don't believe we can get LLC?

thanks

[Nicholas Q.]

@Andrew Postell Okay, so I just closed on my property this week.  I'm ready to send in the deed of trust to the county.  However, I'm not very sure what the lien amount should be given my remodel costs could fluctuate quite a bit.  I'd like to wait until I get into the remodel and have a better idea of the end costs of the project.  Is there any reason I need to submit the deed to the county now or could I wait until much closer to when I plan to refi?

[Josh Norell]

Originally posted by @Nicholas Q.:

@Andrew Postell Okay, so I just closed on my property this week.  I'm ready to send in the deed of trust to the county.  However, I'm not very sure what the lien amount should be given my remodel costs could fluctuate quite a bit.  I'd like to wait until I get into the remodel and have a better idea of the end costs of the project.  Is there any reason I need to submit the deed to the county now or could I wait until much closer to when I plan to refi?

 I believe you could just estimate high. If rehab costs come in lower than expected, when the bank requests the payoff amount for the refi, you could provide them a lower number.

[Megan Brooks]

@G Calendar how did it work out with your property and this BRRRR financing strategy?

[Bret Winegar]

@Andrew Postell.  This thread is gold.  Thanks for posting this content!  I've got this up and running with one refi completed and 3 others in the works.  The trick is to find a lender and a title company to play ball.  I found that getting the loan officers to ask their underwriters before submitting an application to be helpful. 

[Rich Ramjatan]

Originally posted by @Bret Winegar:

@Andrew Postell.  This thread is gold.  Thanks for posting this content!  I've got this up and running with one refi completed and 3 others in the works.  The trick is to find a lender and a title company to play ball.  I found that getting the loan officers to ask their underwriters before submitting an application to be helpful. 

Bret, do you mind sharing what specific questions you asked your lender to see if they would work with you on this?

I read the entire post Page 1-13 , and it seems the only issue that I could potentially face is if the lender ask why my LLC owned me funded the purchase. How do we answer this question to the lender ?

[Don Pham]

@Andrew Postell I'm about to close on a property in a week, and I want to make sure I've done things correctly. 

1. Write up a note from my LLC and myself for the loan 0% interest, 12 month term, 70% of ARV

2. Have the closing agent/title company file the lien with the closing

3. Do the rehab

4. Get an appraisal

5. Apply for a rate/term refinance

The questions I have are the following

1. Does the lien need to be filed with closing or can I have this filed after the fact, if it's a single loan?

2. The property is in an area with low sales volume. I have concerns about appraisals coming in where I'd like them. What happens if appraisal falls short of ARV? Is the limit still the lower of purchase price or appraisal?

[Andrew Postell]

@Don Pham thanks for the questions. I would recommend that you file the loan at closing, meaning, reflecting on your settlement statement. I would also recommend funding the transaction from your LLC bank account. I am stating these items because at this point there are too many lenders who are requiring these steps even though Fannie/Freddie do not.

Now as far as the house appraising....that's another entirely different discussion.  But if the appraisal comes in lower (or higher) then you can adjust your payoff.  With this technique you can refinance up to 85%.  However, I would suggest limiting it to 80% at current market rates.

Hope all of this makes sense.  Thanks!

[Joseph Rios]

@Andrew Postell This is an awesome read, I wish I would’ve come across it sooner. We closed on a 2 family fixer upper last week (cash deal) and I am now just finding out about the 6 month seasoning period for the cash out refi. Your method makes complete sense but I’m afraid I am too late for that, I’ll just have to wait out the 6 months to get all my cash out :(

[C-Dell J.]

Tip; For anyone using this strategy. Make sure you transfer/withdraw funds you tend to borrow from your LLC's (self) bank account. (As stated somewhere within this thread)

[Alexi Schreier]

@Andrew Postell Thank you for this glorious post.