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]

@David Venancio if you are using a Fannie/Freddie type of loan you cannot close or lend to a LLC. Those loans will have the best terms/rates you can find. There are certainly OTHER loan types that do lend to a LLC if that is the item that is necessary for you. If you are ok with having the loan under your name....and the house under the LLC name....then you can still get a Fannie/Freddie type of loan. You would close in your name, then after closing transfer the deed of the property to a LLC. The loan would stay in your name in that scenario. I hope this helps with what you are needing but tag me if you need anything else. Thanks!

[Scott Smith]

The one strategy that works to get the beneficial financing options available through using a Fannie/Freddie type of loan while also getting the liability protection of an LLC is by the use of Land Trusts. You would rake out the loan for the property in your own name, then transfer the property into the land trust (which does not trigger the Due on Sale Clause because of the St. Germain Clause,) and then assign the LLC as the beneficiary of the Land Trust. When you have established the operation agreement of the LLC correctly, this will allow you to operate and be protected via the LLC while having access to great financing options.

This should be a pretty easy task for an experienced attorney. If you have any questions on this issue feel free to ask. This  is not legal advice, just my opinion as a real estate investor.

[Michael Fliderman]

@Andrew Postell @Scott Smith

I have a question regarding a slightly modified scenario than what you are talking about. 

I'm about to be in contract for a Foreclosured Duplex that I plan to rehab and rent out. I plan to buy the property all cash then I want to refinance all my invested money out of it. 

Purchase Price - $350k
Rehab - 40K
Total - 390K

ARV - 560k

I wanted to know if I can use 1 of my LLCs (A) to loan the cash to my other LLC (B). I then would like to refinance for the full appraised value and pay off the loan from A. And have no cash invested in the home. Can I do this? Is there a seasoning requirement for this?

Please correct me if im wrong but I think this scenario is slightly different from the one you posted because I would like to keep my property in an LLC and not have it in my personal name.

[Andrew Postell]

@Michael Fliderman keeping your property in your LLC at all times is a common question and the right answer here is that if you are trying to do that then none of this post applies. This post is specifically for Fannie Mae and Freddie Mac loans. Fannie/Freddie will require you to close the loan in your name and have your name on the deed as well. Having said that, many investors still go the Fannie/Freddie route and then change the deed of the property back to their LLC after closing.  However (and this is a big however), if the laws are still the same from when I used to live in NY then you might have a "transfer tax" to pay.  Florida has this same law as well.  If you change the entity on title...you pay a tax.  And it's not small.  Again, it has been a while so please consult with a NY title company to confirm this.

So if you want to purchase a home in a LLC name and keep it in that LLC (for whatever reason) then you would need a portfolio/commercial loan. And those loans will have an entirely different rules since those rules come from that bank itself...their "portfolio" of money (thus the name). Fannie/Freddie loans come from those agencies so we know those rules BEFORE we even approach a lender. The bank you use for your portfolio loan COULD IN FACT have the exact same rules when it comes to "seasoning".....or they may not have ANY such rules...or their rules could be even MORE strict!  Again, since each lender/bank sets the rules for their own money...you would literally have to call and ask each bank about it.  Sorry there is not a concrete answer here that would apply across the board but I hope I made some sense with this stuff.  Ask away if you need anything else.  Thanks!

[Michael Fliderman]

@Andrew Postell

Thank for you the information. What would be your suggestion in this case for me to obtain a mortgage with as good of a rate as possible and leaving little to no money in the property?

Do you think it would still be a good idea to have LLC-A lend to LLC-B to purchase the property and then find a lender to refinance? Or just purchase the property cash and then try to refinance? Or some other suggestion?

I really appreciate the help! And yes you are correct there is still a Transfer Tax that applies when changing the name on the deed (0.4% of pruchase price). I would prefer to not to transfer to my name and then back, I would prefer to remain as anonymous and protected as possible.

[Andrew Postell]

@Michael Fliderman if leaving the LLC on the title is the priority then you need to go the portfolio/commercial route. Rates are never as good that way....don't get me wrong here, many an investor use those loans and are very successful....just know that the rate/terms are different going that route. Not sure what the benefit is in lending from one LLC to another....I'm open to hear what you were thinking....but the next step is for you to find a lender that writes portfolio/commercial loans and find out what the terms and conditions are on their loans. The New York forum might be a reasonable place to start. Lots of NY locals hang out there and should have some good recommendations. Good luck!

[Michael Fliderman]

@Andrew Postell

I appreciate the help Andrew! I'll definitely do that. I've already been calling Banks and other lenders and getting some decent rates.

[Anan Smith]

Great post. Thank you!

[Kiernan Brown]

@Andrew Postell loved this thread very informative. We are purchasing a $35000 duplex cash with exterior paint and some other small items it should appraise for @50k. Does the "Lending LLC" need to be set up to write purchase loan before closing. Or could "Lending LLC" be set up after still write loan and then Property Owner then refi's after some work is completed to ensure 70% ARV. Please advise and thank you.

[Greg Soon]

This is a fascinating discussion but still over my head as I am relatively new. I just purchased my first foreclosure property with cash and now is looking to get the cash out quickly for the next purchase.

I read through every post here, and I have the "big picture" on what to do, but still not sure of the details in each step, particular on which forms I need to fill. I did find generic deed forms. What other forms do I need to fill? When I apply for refinance, the bank will typically ask me for mortgage statement, how should I prepare one? Do I need to prepare a mortgage note?

Could you create a more detailed instructions for the process for newbies like me?

Thanks

Could

[Jinkai Gao]

Thanks for the detailed information and kind help here, @Andrew Postell ,  One thing I am not quite following here is that since "If you purchased the investment property with a loan, then conventional loans will require you to wait 6 month to take cash out.", then why the would the term be more favorable if you have your own LLC loan you the money for closing, you essentially still "purchased the investment property with a loan", right？ What am I missing here?  Thanks!

[Anthony Vann]

@Greg Soon If you just purchased your foreclosure and want to get the cash out then all you need is a traditional cash out refinance. Your lender will tell you what they need but it usually involves tax returns, HUD1 for the property, check stubs from you, and a copy of the lease if it's rented out. You do need to wait the six month seasoning period though. If you want something sooner there are other options but they're more expensive. 

[Jeremy Dockendorf]

@Jinkai Gao your misunderstanding is likely because you put your emphasis on the wrong thing. It’s not a matter of using a loan vs. not using a loan. It’s a matter of doing a cash out refi vs. a traditional refi. When you don't take cash out with the refinance - you're just refinancing with a different lender. (This is typically done for a better rate or term). So your new bank will just pay off the loan to your "LLC bank" and you have a new mortgage with your new bank. Then you can take the repayment funds out of your "LLC Bank" and use them to buy your next deal - essentially cashing out. Make sense?

[Jinkai Gao]

Thanks Jeremy, is there 6 months seasoning for "you’re just refinancing with a different lender." ? My original understanding is that there will be a 6 months seasoning if not cash buy.

Originally posted by @Jeremy Dockendorf:

@Jinkai Gao your misunderstanding is likely because you put your emphasis on the wrong thing. It’s not a matter of using a loan vs. not using a loan. It’s a matter of doing a cash out refi vs. a traditional refi. When you don't take cash out with the refinance - you're just refinancing with a different lender. (This is typically done for a better rate or term). So your new bank will just pay off the loan to your "LLC bank" and you have a new mortgage with your new bank. Then you can take the repayment funds out of your "LLC Bank" and use them to buy your next deal - essentially cashing out. Make sense?

[Jeremy Dockendorf]

Nope. That’s what this article is all about. It’s not a matter of “cash buy”. Whether you paid cash or took out a loan has less to do with it. It’s a matter of cash out refi vs. traditional refi. Because you aren’t doing a cash out refinance, you don’t need seasoning. You can refinance with a different lender after 1 day. 

Originally posted by @Jinkai Gao:

Thanks Jeremy, is there 6 months seasoning for "you’re just refinancing with a different lender." ? My original understanding is that there will be a 6 months seasoning if not cash buy.

Originally posted by @Jeremy Dockendorf:

@Jinkai Gao your misunderstanding is likely because you put your emphasis on the wrong thing. It’s not a matter of using a loan vs. not using a loan. It’s a matter of doing a cash out refi vs. a traditional refi. When you don't take cash out with the refinance - you're just refinancing with a different lender. (This is typically done for a better rate or term). So your new bank will just pay off the loan to your "LLC bank" and you have a new mortgage with your new bank. Then you can take the repayment funds out of your "LLC Bank" and use them to buy your next deal - essentially cashing out. Make sense?

[Jinkai Gao]

Oh, I think I see it now, so basically try to use the first loan to cover the purchase price and the reno cost, and then refi it out. It’s like you used your money to cash out loan first (so no restriction). Took several tries for me to realize cash out vs refi is the key different here. Thanks, Jeremy! 

Originally posted by @Jeremy Dockendorf:

Nope. That’s what this article is all about. It’s not a matter of “cash buy”. Whether you paid cash or took out a loan has less to do with it. It’s a matter of cash out refi vs. traditional refi. Because you aren’t doing a cash out refinance, you don’t need seasoning. You can refinance with a different lender after 1 day. 

Originally posted by @Jinkai Gao:

Thanks Jeremy, is there 6 months seasoning for "you’re just refinancing with a different lender." ? My original understanding is that there will be a 6 months seasoning if not cash buy.

Originally posted by @Jeremy Dockendorf:

@Jinkai Gao your misunderstanding is likely because you put your emphasis on the wrong thing. It’s not a matter of using a loan vs. not using a loan. It’s a matter of doing a cash out refi vs. a traditional refi. When you don't take cash out with the refinance - you're just refinancing with a different lender. (This is typically done for a better rate or term). So your new bank will just pay off the loan to your "LLC bank" and you have a new mortgage with your new bank. Then you can take the repayment funds out of your "LLC Bank" and use them to buy your next deal - essentially cashing out. Make sense?

[Bernie Granier]

I didn't read every post in this thread but, I have a question that I didn't see answered skimming through them. If your LLC has a note on the property, why couldn't you write that loan with competitive terms and then sell it once all the repairs are completed? That way you could get back the remaining balance of the note plus some of the future interest.

[Jonathan Balog]

@Andrew Postell

I have a few questions regarding this that I have not seen covered yet in the thread:

1. Does the LLC have to be originated in the state that you're buying property in? I am considering trying this for an investment property in Ohio and my LLC is registered in California.

2. I believe the bank will calculate the LTV either as a percentage of the purchase price or a percentage of the appraised value, whichever is lower, is that correct?

3. One of the deals I would like to try this on is a wholesale purchase where I would be paying an assignment fee for a contract. If the contract price was $60,000 and the assignment fee was $12,000, I would be paying a total of $72,000. If I think the ARV/appraised value will be around $90,000, should I have my LLC lend me $71,500 (75% of $90k is $67.5k plus $4k for closing costs) to close on this property then when I refi, I can get the entire $71.5k back?

[Jonathan Balog]

@Andrew Postell

My apologies, my previous post comes across as a bid rude/demanding.  You've added tremendous value to this topic on BP and I am in the middle of trying to perform this process on a property.  I appreciate all the knowledge drops here and this is one of the reasons BP is so great. 

[Eric Brenneman]

Great, thank you for this explanation. As a new investor, I was getting stuck on this loop, but you've helped to clarify.

[Andrew Postell]

@Jonathan Balog good questions.  And I didn't detect that at all.  Thanks for your patience as I replied here.  Here's the answers:

1. Does the LLC have to be originated in the state that you're buying property in? - No, it certainly does not.  I would recommend that if your legal professional states otherwise then please follow their recommendation but for the LOAN there is no need to have the company headquartered in any specific state. Meaning, that since we are using Fannie Mae and Freddie Mac rules to refinance your loan, there is no requirement that states the company must be in the state of the property. If your company were to start selling goods and services and make revenue in the state then this would be a different answer. But we are creating a loan, that we charge 0% interest on, so that it is NOT a taxable event, and your customer....is you, and you reside in California. From the loan perspective you can use your LLC created in California but I will always defer to other legal advice if they recommend doing it a different way just in case.
2. I believe the bank will calculate the LTV either as a percentage of the purchase price or a percentage of the appraised value, whichever is lower, is that correct? - Now that is incorrect. That verbiage is directly from "delayed financing". And that is what we are trying to avoid. The first 2 sections of the original post talk about this but we are NOT doing a delayed financing transaction. Delayed Financing means you purchased with cash.....but you did not purchase with cash...you purchased with a loan, a loan from yourself. We are just documenting that with the LLC. it's kind of like when you were in grade school and you were really good at math and your teacher would come by and say "show me your work". All we are doing is showing our work. When you buy with cash, nobody sees where the money came from, they don't know where the new loan is going....lots of unknowns. So if you file a lien....at the county courthouse....where the title company can validate it...now they can "see the work" and feel better about it. So you can get 80% or 85% of the ARV on a home with this strategy.
3. Can I get the entire $71.5k back? - the answer here is yes.  How much money did you borrow from yourself?  $71.5k?  Then that's how much of a loan I would file.  I encourage everyone to document EVERYTHING...meaning, the utilities, the acquisition costs, the insurance....these are all costs you pay with your money...just show the work of what you "borrowed" from yourself in that lien.  Hope that makes sense.

Feel free to ask anything else if you would like.  Thanks!

[Jonathan Balog]

@Andrew Postell

Thank you for the info! 

[Tristan Colborg]

@Andrew Postell Looking to take advantage of this strategy on a triplex I'm under contract on, I did have a question however. Does the lender doing the rate term refinance not care what the terms are on the loan/lien from the my LLC to me, or can they not see the current terms? Sorry just not 100% sure on that piece.

[Andrew Postell]

@Tristan Colborg the answer to your question is "yes" they will care....but only because Fannie Mae and Freddie Mac care.  The strategy here is based on Fannie/Freddie just in case it wasn't clear previously.

So Fannie/Freddie say that in order to refinance there must be a "Benefit to the Borrower". So if your LLC loan is a 0% rate for 30 years....well, a Fannie loan of 5% for 30 years would actually be a WORSE loan. So your initial loan needs to provide a reason to refinance. A 0% rate is fine....as long as there is a balloon clause (meaning your entire loan is due in full). We usually structure them with a 0% rate with a 12 month balloon. That will create the "need to refinance" according to the Fannie/Freddie guidelines. Hope that answers your question!

[Jonathan Balog]

@Andrew Postell

Instead of my LLC loaning myself the money out of my LLC's checking/savings account, could I take out a business line of credit with my LLC and use those funds to loan myself the money?