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!

[Kenny Lee]

Originally posted by @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)

so make sure the cash i'm going to drop on the home comes directly from my LLC's bank account?

[C-Dell J.]

@Kenny Lee. Yes. This way the lender can see bank statement showing the withdrawal, at least with my current lender.  My lender somehow wasn’t on the same page with me, and processed refi as a cash back, which doesn’t work in less than 6 months.  

So as mentioned before, Step #1 is to find the right lender! Before you find a property

[Kenny Lee]

@C-Dell J. thank you for the insight!

[Cooper B.]

@Andrew Postell If the initial mortgage (LLC to individual) is for ~75% ARV, but initial purchase price is for much less than that, then how do I make the proper paper trail for the lender to see? If the LLC funds a loan for more than the purchase price, then I assume the attorney just gives me (the buyer) a refund for the difference at closing?

Also, is there a reason the same end result could not be accomplished if the LLC takes title at the initial purchase, rehabs, rents, etc., then "sells" to the individual. The individual gets the fannie/freddy loan as a new purchase. In other words instead of a refinance, it would just be a new purchase.

[Al Barksdale]

@Cooper B.  Great thinking here!  
I'm not a CPA nor an attorney, so this should not be taken as legal or financial advice.  You should speak to a professional to get such solid advice for your individual circumstance.

Now, doing a sale to yourself, even if it is technically not "yourself",  is not an arm's length transaction and the IRS would likely disallow it if audited. This is especially true if you are a single member LLC. 

however- IF YOU'RE MARRIED & YOUR WIFE JUST so HAPPENS TO BE IN THE MARKET FOR A NEW HOME.....

[Andrew Postell]

@Cooper B. thanks for reaching out. I think you are speaking to how this is accounted for on your HUD/Settlement Statement and essentially you show your purchase price (like normal) and then your repairs are in "escrow" on the statement. That way it balances. I hope that answers that question.

And YES, there is very specific reasons why you cannot take ownership in your LLC name but this would be an extremely long post response to go into it but essentially you need to take ownership in your personal name to make this technique work in 99% of the scenarios.

Hope all of that makes sense.

[Andrew Postell]

@Al Barksdale thanks for the post and the compliment. Keep in mind we are not selling anything here. We are only lending. And yes, I have spoken with the IRS extensively about this process. We charge a 0% interest rate in this technique because so you have no taxable income for your company when you do it. And we use the LLC because a C-Corp and S-Corp are REQUIRED to charge interest when lending. Each step has been meticulously vetted and while there have been some slight changes over time the same process has been working for years and years. Feel free to ask anything else if you need. Thanks!

[Ben Ford]

Hey @Andrew Postell - Thanks for the great info, I reached out to a lender to talk about doing this and they said it made no difference whether they were taking on an existing loan for a cashout or doing a new one - they still needed a 6 month seasoning period from date of purchase. Am I missing something?

[Andrew Postell]

@Ben Ford so finding an investment friendly lender is one of the most important steps for any real estate investor even if you are NOT using this strategy.  Having ANY SEASONING AT ALL is a deal breaker to just about all of the scenarios you will face as an investor. You must only work with lenders that have ZERO seasoning requirements. Otherwise, even the BRRRR method would not work.

Keep searching for a better lender.

[Davide Pascucci]

@Andrew Postell great stuff! Thanks for the info, I will contacting you soon

[Joe Roberts]

@Andrew Postell

Thanks so much for this thread and your diligence in continuing to inform the community still 3 years later. 

I have a property that I purchased in my LLC planning on doing a portfolio loan on. Now after reading through this thread I would like to be able to take advantage of conventional rates and apply this method.

Can I QC the deed from my LLC to myself and then file a lien for a mortgage from that same LLC to myself and still qualify to refinance with a Fannie/Freddie loan? If so, any time requirements associated with those actions?

[Andrew Postell]

@Joe Roberts just owning a property in an LLC does not disqualify you from conventional financing but to implement the strategy I referenced it would be difficult to do it in hind sight. Just keep it in mind on the next one.

[Jibu V.]

@Andrew Postell I read the entire thread - thanks! 

Since the recommendation now is to fund the purchase from the LLC's bank account, what if I'm using a HELOC that's in my personal name?

1. Logistically, would I just draw from the HELOC directly into my LLC's bank account and then immediately be able to use those funds as long as they are available?

2. When the title company puts the rehab funds in escrow on the HUD, I think you mentioned that we could hold the money (not title co). What would we need to tell the title company so that they agree to let us the hold the escrowed funds?

[Andrew Postell]

@Jibu V.

1. Yes! That's the precise method to use. If you are using strict accounting software this would be titled "cash injection" for your LLC. But the loan itself doesn't care about that. Just fund it through the LLC bank account.

2. I have not met a title company who has not permitted us to use the repair in escrow method.  Title companies don't really want to hold anything in escrow - that means more work for them!  I can't speak for every title company in the country but they should be ok with that part of the equation.

[Benjamin Hirsh]

Andrew

Thank you. This is very high level, but very valuable information.

3 questions

1. You said you need an investor friendly lender who does not have seasoning requirements? Is there such a lender who would allow this? I mean, is that not essentially the same thing as finding a lender who allows for a BRRR (whether or not with hard money) or delayed financing - without a seasoning period? If so, how do you even raise this topic of 'just rehabbed a property with a loan and want you to refinance with no seasoning' to a lender?

2. This is all presupposed on the bank's appraisal of the property, correct? I mean - you can't just ask them to refinance a loan (even with unfavorable terms) that is much higher than expected appraisal? Not suggesting that this was your suggestion - just curious, you can't inflate the loan terms and hope that the bank will refinance at 100% of what you put down for the initial purchase price and rehab costs, ie., it will still be 75% LTV no matter what the initial loan terms were?

3. You said lender's speak to each other. What do I do if a lender calls me to ask questions? Also, as an out of state investor? I would have to personally go there to make sure the deed is recorded, correct?

[Andrew Postell]

@Benjamin Hirsh thanks for reaching out.  Here are your answers:

1. I wrote a post that will help with finding good real estate investment friendly lenders that you can find HERE. But yes, we absolutely want to be asking this as a question. No seasoning should be a requirement for any lender we work with when using the BRRRR method.

2. Correct.  A lender will require an appraisal on the property.  The lender's evaluation is what they will base their loan on.

3. And we rely on the title company to file the lien for us.  They are filing all the paperwork when you close on the property any way so what's one more piece of paper.  They usually charge a nominal fee, like $150-$200 to do it and on your first time it's good to see how it's done so you know it's done right.  And everything is on the up and up so when the lender "calls" you it's the lender you are working with.  So you both should be on the same page on all of this.  A lot of times people will just call me to help with these steps here and certainly willing to help in anyway if needed.  

Thanks!

[Bret Winegar]

Originally posted by @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 ?

Rich!  Sorry for being 5 months late.  I use SNMC.  I've been able to use two different loan officers with them in different states.

[Andrew Postell]

@Bret Winegar ha, no problem.  This post is almost 4 years old and going pretty strong.  Someone will read it. Thanks for the recommendation.

[Chaise Lopez]

Hi @Andrew Postell, would this work when buying a property cash from the auction? Could my LLC in theory give me the loan to purchase the property from the auction?

[Andrew Postell]

@Chaise Lopez absolutely!  That is a great time to use this method if you need conventional financing after you rehab it.

[Noam Ofan]

@Andrew Postell

@Andrew Postell - Great article.

So if I buy a property with a conventional 25% down loan, then rehab it and then before 6 months go by I want to refinance based on the new ARV I can't do it? I need to wait 6 months for the refinanced loan to be based on the new ARV?
Whereas if my LLC gave me the mortgage then I don't need to wait 6 months to refi based on the new ARV?

[Steven Goldman]

Wow, we have numerous lenders that will refinance properties which have been rehabbed without a one year seasoning requirement.  If you are purchasing the property in a distressed condition the issue of seasoning should not be an impediment to a cash out, or bridge to permanent transaction. 

The lenders we use have about a 30 to 45 calendar day process. The costs might range from 1to 2k. plus our fee. Unless you have really poor credit funding is much easier these days than it used to be. Lenders will base your permanent loan on debt service coverage and many will not look at your DTI and other personal finances except to collect the information for compliance purposes. We place vacation rentals and many other properties which have been recently renovated and purchased at distressed prices. It is harder to find a good deal, than to find the money to do it!

[Andrew Postell]

@Noam Ofan so no, you can refinance right away with a conventional loan and get the ARV of the property. It's TAKING CASH OUT that you have to wait on. So if you buy with cash.....instead of buying with cash then borrow the money with your LLC. If you are buying with a loan already, then hardly anything in this article will apply. Also, conventional loans do have a 20% and 15% down option on single family homes and they also have a renovation loan too. If you are purchasing a property with a conventional loan, you are already in the lowest rate you can get...so there's no need to refinance.

[Noam Ofan]

@Andrew Postell Thank you

[Forrest Hayashi]

Originally posted by @Steven Goldman:

Wow, we have numerous lenders that will refinance properties which have been rehabbed without a one year seasoning requirement.  If you are purchasing the property in a distressed condition the issue of seasoning should not be an impediment to a cash out, or bridge to permanent transaction. 

The lenders we use have about a 30 to 45 calendar day process. The costs might range from 1to 2k. plus our fee. Unless you have really poor credit funding is much easier these days than it used to be. Lenders will base your permanent loan on debt service coverage and many will not look at your DTI and other personal finances except to collect the information for compliance purposes. We place vacation rentals and many other properties which have been recently renovated and purchased at distressed prices. It is harder to find a good deal, than to find the money to do it!

 Hi Steven, 

Are these lenders that you're spoke of, able to provide conventional 30 year fixed rate loans?

Thanks!