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]

@Nicholas Q. I have spoke with the IRS about this - at length. This is why we choose the LLC route. You are correct with the IRS requirement on loans but that is mainly for C-Corps, S-Corps, and partnerships. Especially if they lend to other entities. But if you are using a single-member LLC lending to an individual then it is not required. Now, I will absolutely recommend for you to consult your CPA and whatever they say goes - but there's a reason why we use the LLC in this method and that is the main crux of it. Hope all of that makes sense.

[Andrew Postell]

@Harry Nima Zegarra you want to do the transfer AFTER you close.  So you already have your money if you are following me.  As long as you close in your name, that's what Fannie/Freddie require.  And yes, as long as you pay that loan on time, the lender makes TONS of money on you.  They don't want to stop making money.  There's more to it than just that but no bank is going to do anything if your loan is in good standing.  Just pay on time and you are good.

[Harry Nima Zegarra]

@Andrew Postell Good deal, it makes sense... thanks so much again!

[Katherine Preston]

@Andrew Postell, I love the ideas you are discussing here, however, I am new to real estate investing and have some questions!

1. How does a non-cash-out refinance differ from a cash-out refinance when it comes to these rules?

2. Why does this allow you to avoid the six-month period?

3. How would I structure the loan from the LLC? Would this be a mortgage? Do I need to be a broker to write it?

4. If it is not a cash-out refinance, does this mean I can only refinance it for the remaining/original balance of the LLC loan, or can I actually cash out at 75% ARV?

5. If I can pull 75% of ARV regardless of the original loan amount, why is it that I can classify this as a non-cash-out refinance but pull more than the original LLC loan?

6. Are there any books you can recommend that discuss this strategy in greater detail?

7. I've heard there are tax implications to pulling money back out of an LLC. Some suggest funding the LLC with your capital via a loan going the opposite direction: From the investor to the LLC, that way any money you pull out of the LLC (as a withdraw of owner's equity and not to purchase any properties) is merely a loan payment. Can I combine this LLC funding strategy with the LLC property financing strategy you are recommending, so that it essentially looks like this:

Thank you so much, in advance!

[Andrew Postell]

@Katherine Preston admittedly this is a mid-to-expert level of a strategy. We're talking about buying with cash, learning how to be a lender, etc. So this strategy makes assumptions that the investor will know how to calculate ARV, calculate holding costs, renovation costs, what loan types they are prequalified for, etc. Specificaly, this is for cash buyers who qualify for Fannie/Freddie loans. Now, I can still answer your questions of course but if you aren't a cash buyer who can qualify for Fannie/Freddie, then none of this will even matter. For ease, I'll list them just as you have them above. Here's your answers:

1. How does a non-cash-out refinance differ from a cash-out refinance when it comes to these rules? - The difference here is that if you purchase a property with cash....all Fannie/Freddie loans directly after the acquisition of the property are cash out loans.  They are writing you personally a check.  If you file a loan, we are refinancing an existing lien.  That is the difference.

2. Why does this allow you to avoid the six-month period? - Because you filed a lien.  If you filed a lien, that means you can do a "no cash out" loan. Without a lien, it's a cash out loan.

3. How would I structure the loan from the LLC? Would this be a mortgage? Do I need to be a broker to write it? - You do not need a broker.  This is from you.  Your company.  A title company can help you draft any necessary documents.  We usually do a 0% rate loan with a balloon payment attached.

4. If it is not a cash-out refinance, does this mean I can only refinance it for the remaining/original balance of the LLC loan, or can I actually cash out at 75% ARV? - Correct with this not being a cash out loan.  No cash out.  So you can refinance the existing lien up to 85% of the ARV.

5. If I can pull 75% of ARV regardless of the original loan amount, why is it that I can classify this as a non-cash-out refinance but pull more than the original LLC loan? - With ANY loans your ending balance can be larger than your beginning balance.  Just stop paying a loan and watch how many fees a lender starts charging!  ANY loan can have a higher balance and this includes most loans that we work with as investors.  A renovation loan for instance, you make draws on the loan making the balance higher.  And alternatively, ANY loan can be lower than the amount of the initial loan.  You might make payments to a loan paying it down.  The initial loan amount is somewhat inconsequential.  I want everyone to be as accurate as possible because it helps them with calculating their deals.  But it can be higher or lower.

6. Are there any books you can recommend that discuss this strategy in greater detail? - Nope, as far as I know I am the only one that teaches this strategy.

7. I've heard there are tax implications to pulling money back out of an LLC. Some suggest funding the LLC with your capital via a loan going the opposite direction: From the investor to the LLC, that way any money you pull out of the LLC (as a withdraw of owner's equity and not to purchase any properties) is merely a loan payment. -  I'm ok with you lending your capital to your company initially.  A "cash injection" or whatever accounting measure your CPA recommends.  All of that is fine.  Some people fund raise from many different sources too.  The method of HOW your company received the money is not a determining factor for this strategy.  Just filing the lien is the important factor.  And the reason why we use a 0% lien is so that there are NOT any tax implications - if no income is earned, then no taxes can be collected.

I hope all of this makes sense but let me know if you have more questions. Thanks!

[Katherine Preston]

Thank you for getting back to me. This is a huge help in internalizing these concepts. I am positioned to begin investing in real estate with all-cash deals but am just trying to learn as much as I can and meticulously plan my strategy so there are no gray areas where I would sacrifice opportunity or create unnecessary risk.

What threw me off on refinancing was just my misunderstanding of the terminology. My mortgage experience is limited to VA mortgages for my primary residence, and consumer marketing tends to refer to refinancing at amounts above the current mortgage balance a "cash-out refinance," which is why I did not understand why, for example, if my LLC loan is for 70% of ARV how I could then refinance at 85% ARV without being considered a "cash-out refinance." But I now see it is only considered a cash-out if there was never a lien on the property in the first place.

I greatly appreciate your patience in taking the time to answer my novice questions. I've been reading several of your posts, and you are a rockstar on here, by the way! Thanks again!

[C-Dell J.]

@Andrew Postell. Hey Andrew. I’m getting closer to putting your strategy into play!  

Question: What if I Purchased house with cash , borrowed from LLC, rehabbed, and followed all of your steps, except STEP #1 ( Getting Pre-Approved 1st).... now ready to refinance

How do I approach potential lenders now to do refi step? How to pose the question?

Can strategy still work?

[Shaheen Badiyan]

Hi @Andrew Postell. Thank you for taking the time to put this together. It is very helpful! I have a quick question about using an LLC with this process. If I want to purchase the property with an LLC, would I need two separate LLCs (i.e. LLC A lends money to LLC B to purchase the property)? Or would it be just one LLC that lends money to me in which I buy the property under my name and then transfer it to the same lending LLC after closing?

[Andrew Postell]

@C-Dell J. so this strategy is for Fannie/Freddie loans.  So if you cannot qualify for a Fannie/Freddie loan, then there is no need to do this strategy.  Meaning, you would use a different loan type that may not need any of this.  Now, if you would be able to qualify for Fannie/Freddie and you did all the steps above, except being prequalified, then you could just apply for a loan as normal.  Hope all of that makes sense.

[Andrew Postell]

@Shaheen Badiyan yes, 2 seperate LLCs.  One to buy the property and one to be your lender.  Hope that makes sense.

[Andrew Postell]

@Katherine Preston I want to be very clear here - if your our of pocket costs to buy and rehab a property are 85% of the ARV - then that is the loan you should file. Fannie/Freddie loans are allowed to provide an "incidental" amount of money (usually about $1000) to you at closing and still be a "no cash out loan"....but if we go above that amount then it becomes a cash out loan. So if you filed a 70% loan....but used 85% to buy and rehab...then you will not be able to get the extra 15% back to you. In that scenario you should file a 85% loan. I hope that makes sense.

[Tristan Colborg]

@AndrewPostell

Question for you on this strategy. I purchased a property using a HELOC from my primary residence. Upon purchase I had my title company file a lien on the property for my LLC with the 0% 12-month term. I'm now looking to do the rate term refinance but do have a question. Because I used the HELOC from my primary residence, which is what I want to pay back with the new loan, the monthly payment on this will be included in my DTI correct. Because according to the lender the new loan is going to be used to pay off the lien/loan from my LLC not the HELOC correct? I'm trying to make sure I understand this correctly and want to give myself the best opportunity to be approved. Thanks in advance.

[Andrew Postell]

@Tristan Colborg correct on the payment item. Any payment that you are personally responsible for is held against your "debt to income" ratio. So this loan strategy is used to pay back to lien itself, and not the HELOC. Now you will be paying the HELOC back....but that cannot be reflected in the refinance step because it will show you are paying back the lien. So you have that correct. Your prequalification in this scenario is very important to detect if you can support a HELOC payment or not. I'm guessing that maybe the lender is saying that there is an issue there? Make sure they are using rental income from your property to help you qualify. I can't tell what your HELOC payment is but they are usually pretty low so unless you were already very close to not qualifying the payment should be ok to have. I hope all of that makes sense.

[Nicholas Q.]

@Andrew Postell I am under contract for a property and going to use this strategy. I have an existing LLC for a separate investment property with a partner. This new property I am buying under only my name and not with my partner.

In order to close quickly, I was thinking of using the existing LLC instead of opening a new one. My partner is okay with me using the LLC as the lender for this deal. Is there any reason why I should not do this? I am thinking the accounting could be difficult because I have to transfer a large sum of money from my personal account into the partner held LLC and somehow have to account for that transaction. Can it just be recorded as an owner contribution?

[Katherine Preston]

Since it's a partner LLC and it's 100% your funds, you may consider funding the LLC as a loan as well. Where you loan money to the LLC and the LLC then loans that money to you. Then, that is a liability to the LLC and not an asset which would be split with your partner, but that's just how I would approach it. Probably best to wait for more experienced input.

[Andrew Postell]

@Nicholas Q. thanks for your patience here.  I chose a crazy time to travel...but I am now back.  Anyway, you can 100% do this in the method you are describing.  I do like the "owner contribution" for accounting purposes...sometime "cash injection" is fine too.  Now the loan itself doesn't care about any of that...just that the mortgage/lien is recorded on title.  But we do want to practice good accounting all the same.  Hope that helps.  Thanks again!

[Christopher Dean]

@Andrew Postell

Excellent post that’s obviously been of great value for years now. Great read with all the replies especially. Thank You. 

I am attempting to implement this and my situation varies just slightly. 
Please tell me if the following steps will work for this

1. I am buying an existing 4 plex from my mother's LLC ( which I think doesn't matter) and I owned it 10 years ago and sold to her.

2. There is an existing loan that is still in my name from years ago that she just kept making payments on that I plan to leave in place for now. I am giving her additional cash plus notating additional loan escrow for rehab ( but no money moved around for repairs yet) included on the HUD-1 ( all borrowed from my LLC of course)

3. I think I have to put the new extra loan from my LLC in place at closing. I think it has to be done then and reflected on the HUD since another previous mortgage in place ?

4.  Then refinance. And if I have borrowed too much, then I can pay that down after appraisal but before giving payoff to lender ?

 So 

- old loan 10 yr old still in place

- New loan from my LLC up to 75% ARV total for both old and new

- HUD-1 shows seller receiving money, me having money set aside, from extra LLC loan proceeds notated as cash in "escrow" somewhere but no other required documentation.

- Mortgage ( KY document)to file referencing deed lien against property 

- Deed signed by both parties showing sale with only sale price of transaction ( think it only shows sale amount and not mortgage in KY )

- Refinance

Thanks in advance for any and all insight. 

-Chris Dean

[Andrew Postell]

@Christopher Dean how are you buying a property and leaving a lien in place?  How would the title company allow that? The strategy I describe is for cash purchases of a home.  I'm not sure that what you are doing would fit with this method...but also not sure how you could accomplish what you are doing based on how it's described.  I certainly don't know everything but just not sure.

[Christopher Dean]

@Andrew Postell  

It is a lien in my name that was carried over basically as a sub to to my mother years ago.  Since it is in my name still I think I can leave it in place since the hard money lien holder is ok with it.    I am just trying to have less cash invested for the time being.  Your strategy may not work for this situation.  I may close then refi with a local bank then look into a refi with a mortgage broker for 30 yr fixed a year or so down the road depending on the market.  A great strategy for me to implement with another property down the road anyway.  Thank You for this value.

[G Calendar]

Hi
@Andrew Postell I have enjoyed reading all of your posts. I am in the process of implementing as you suggested for a close on May 15th. I have created my LLC, I have drafted a mortgage/note to put a lein on the property at 70% of ARV but my closing attorney is recommending it not be filed at closing because it is a HUD home purchase. He said I should go to the courthouse and file it after I close. I explained what I was doing an why but didn't seem to want any part of it. He didn't even want to file it for me. Does that seen strange to you? I guess I need to learn how to file and record liens now.

[Bryan Freeman]

Originally posted by @Andrew Postell:

3. How would I structure the loan from the LLC? Would this be a mortgage? Do I need to be a broker to write it? - You do not need a broker. This is from you. Your company. A title company can help you draft any necessary documents. We usually do a 0% rate loan with a balloon payment attached.

Hey Andrew,

Thanks so much for the information provided in this thread.  I am in the process of doing this.

  My only question now is in setting up the loan... Can I set it up so that it is 0% interest, no monthly payment requirements, except for the balloon at the end of the one year term? I don't want it to be counted as a monthly obligation for another loan I'm getting in the meantime.  Or, do I need to show some form of monthly principal only payment?

thanks

[Andrew Postell]

@Bryan Freeman yes, set the loan up with 0% interest, no monthly payments, and a balloon at the end of the term.  However, I would encourage you to finish up your current loan before doing anything.  I cannot speak for your current lender on what they will do.  So finish that up first.

[Shawn Legree]

@Andrew Postell

Great info you just blew me away with that one.

[Don Petrash]

Andrew - this is a phenomenally helpful article! I've saved it on every phone and computer platform I have. For those of us planning a series of rapid-fire BRRRR purchases, the notes on avoiding a 6-month or 12-month seasoning period (and routing the mortgage through the LLC) are absolute gold. Thanks!!

[David Ouellette]

@Andrew Postell thanks for your post. Question I have on 6 month seasoning. Does the 6 month period start on day of purchase or do most lenders require 6 months of occupancy and rent rolls? I am looking to rehab and then rent prior to refinance. thanks