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!

[Forrest Hayashi]

Originally posted by @Andrew Postell:

Hi Andrew, thank you for the awesome information and reaching out in anther thread!

I already purchased my property all-cash and put in additional money into the rehab. Just want to confirm. So using this method, i will need to set up a LLC, open a bank account under the LLC's name, file a lien/mortgage on the property from LLC to me, no money transfer is needed (money is all spent haha), refinance with a lender, lender wires the money to my LLC's bank account, create a personal loan note to move the money from the LLC bank account to my personal bank account, rinse & repeat?

Additional Questions:
2) Would that be count as revenue for my LLC to receive such a large amount of money when it did not have it in the first place?
3) Do i ever need a title company in filing the lien at city clerk office?
4) Would the deed in this be withheld by my LLC (in technical sense)?

Thanks again!

[Steven Goldman]

Yes, the loans would be 30 years fixed. Unless you want to go 5-20 higher payments less interest. Turn around time for these loans depends on the appraisal work load in the are the property is located.  

[David M.]

@Forrest Hayashi

if you are going the LLC route and you purchased the property in cash, more like deed the property to your LLC from yourself, and get the commercial loan to cash out (thus the loan is under the LLC's name). Now the funds are in your LLC's bank account. Now, purchase more properties into your LLC from the bank account which is really what you should. If you want to move funds to your personal bank account, just transfer the funds and mark them in your ledger as an "owner's draw."

A cash-out refinance is not considered income.

[Andrew Postell]

@Forrest Hayashi you have most of it right - the conceptual stuff at least. We are filing our loans at closing, funding the purchase from the LLC bank account. Then the next lender (who refinances that loan) will then cut a check to your LLC reimbursing you the money back.

And I want to be clear here - this is to follow Fannie/Freddie rules. They are not the only loans out there. Portfolio/Commercial/DSCR/etc. loans can all be possible to find a 30 year fixed rate. We usually choose the Fannie/Freddie route because they have a lower interest rate or higher Loan to Value. However, its sometimes annoying to work with them because they haver annyoing rules. A commercial/portfolio loan should be a lot easier to work with...but the rate will be higher or you can't get as much cash back, or they have a prepayment penalty....or something else that isn't as desirable as the Fannie/Freddie loan. Don't get me wrong, those loans are absolutely necessary in our line or work, I have used them, and many VERY successful people have never touched Fannie/Freddie...but if I have a choice, and if I want that lower rate or higher LTV then I need to play by their rules.

Anyway, I hope all of this makes sense.  

Oh, and to reiterate other things here - the refinance is not counted as income, filing that lien is performed by the title company, and the deed is held in your personal name.

Thanks!

[Forrest Hayashi]

Thanks Andrew! appreciate you sharing the wisdoms!

Looks like I am outta luck using this method for now as I have already purchased the property directly with cash but I'll be sure to use this method in my next rehab project!

[Forrest Hayashi]

Originally posted by @David M.:

@Forrest Hayashi

if you are going the LLC route and you purchased the property in cash, more like deed the property to your LLC from yourself, and get the commercial loan to cash out (thus the loan is under the LLC's name). Now the funds are in your LLC's bank account. Now, purchase more properties into your LLC from the bank account which is really what you should. If you want to move funds to your personal bank account, just transfer the funds and mark them in your ledger as an "owner's draw."

A cash-out refinance is not considered income.

Thanks David for the info! love the take on "owner's draw"! make sense :)

[Josh Norell]

Originally posted by @Forrest Hayashi:

Thanks Andrew! appreciate you sharing the wisdoms!

Looks like I am outta luck using this method for now as I have already purchased the property directly with cash but I'll be sure to use this method in my next rehab project!

Lenn, not true. You could file the lien at any time after the purchase. Like you mentioned, you can after the initial purchase form an LLC, and file the note and deed of trust(depending on your state). It doesn't have to be filed at the time of purchase. You can file it yourself if you're inclined.

[Forrest Hayashi]

Originally posted by @Josh Norell:

Originally posted by @Forrest Hayashi:

Thanks Andrew! appreciate you sharing the wisdoms!

Looks like I am outta luck using this method for now as I have already purchased the property directly with cash but I'll be sure to use this method in my next rehab project!

Lenn, not true. You could file the lien at any time after the purchase. Like you mentioned, you can after the initial purchase form an LLC, and file the note and deed of trust(depending on your state). It doesn't have to be filed at the time of purchase. You can file it yourself if you're inclined.

 Thanks Josh,

However, do i still need to transfer any cash from my LLC bank account to my personal bank account to insinuate that i borrowed the money from the LLC? My funds are currently locked up in various investments so not able to make those transfers. If just filling the lien and the deed on the property then i wonder if my lender will ask for audit trails.

[David M.]

@Forrest Hayashi

Maybe I don't understand, but why are you filing a lien against your own LLC? I read back up several posts. Anyway, I'm lost...

[Ron Brady]

@David M. I've done a few of these in NJ, following the Andrew's guidance as articulated here. If I am interpreting your question accurately, filing the lien (with the county clerk in NJ) against the LLC is done so that when the bank that wants to refinance you does its underwriting, it sees (by looking in the county clerk recording system) that there is a mortgage (which is the lien). This is the mortgage that it is refinancing.

I notice that in your post you say that you "read back up several posts".  Not sure if this matters, but early on in this long string of posts, there is a detailed step-by-step of what to do, how to do it and why.  Hope this helps. 

[Josh Norell]

The lien is filed by the LLC, against your person. Not the other way.

@Forrest Hayashi, I'm not a CPA, an not qualified to comment on the accounting aspect of this arrangement. As far as the bank is concerned, I don't believe there is anything in the Fannie/Freddie requirements that state a paper trail for this situation is needed. Though that mean that any particular bank doesn't have additional requirements/overlays for this documentation. @Andrew Postell would know much better than I.

I will emphasize the importance of finding a lender who is able to see this loan through. I attempted a refi with a bank who said they could complete the transaction. After paying for the appraisal, and 2 months into the process, the bank backed out of the loan. The appraisal came in lower than expected, causing a situation where I would need to either A) bring money to closing to bridge the difference between the existing lien amount, and the amount the lender would loan. Or B) have the LLC write a lower payoff amount on the existing lien.

I didn't have the money at the time for A. And if I went the B route, the bank was requiring documentation for making payments on the loan, which I did not have. As a result, I was out 2 months, and a $900 appraisal.

This payment documentation must have been a requirement of that specific lender, as I completed this loan later with a different one.

[Andrew Postell]

@Forrest Hayashi @Josh Norell is correct in that Fannie/Freddie do not REQUIRE that lien to be filed at closing....but we have seen a lot of lenders having issues with that since COVID hit.  So we have been filing it at closing ever since to make sure that most lenders could help us with this strategy.  You could find a lender that is ok with filing the lien after closing, but we'd have to know what lender to use...maybe Josh knows someone that will lend in your area that can help with it? But I'm advising everyone to file at closing to help keep as many lenders open to it as possible.  Hope that makes sense.

[Andrew Postell]

@David M. your LLC is your lender....so it's lending TO you. It's your own "hard money lender" if that helps makes sense of it.

[Forrest Hayashi]

Originally posted by @Andrew Postell:

@Forrest Hayashi @Josh Norell is correct in that Fannie/Freddie do not REQUIRE that lien to be filed at closing....but we have seen a lot of lenders having issues with that since COVID hit.  So we have been filing it at closing ever since to make sure that most lenders could help us with this strategy.  You could find a lender that is ok with filing the lien after closing, but we'd have to know what lender to use...maybe Josh knows someone that will lend in your area that can help with it? But I'm advising everyone to file at closing to help keep as many lenders open to it as possible.  Hope that makes sense.

@Andrew Postel @Josh Norell

Thanks both! My property is located in Philly.
Does filling a lien automatically puts the deed under the LLC? or i have to hire a title company to do it? Is it necessary to have the deed under the LLC? Would like to avoid title companies since they usually cost a lot (ies,. ~$4k+ in Philly just to close).

[Sri Chakravarthy]

@Andrew Postell Excellent article will bookmark. Thank you!

[Josh Norell]

Originally posted by @Forrest Hayashi:

Originally posted by @Andrew Postell:

@Forrest Hayashi @Josh Norell is correct in that Fannie/Freddie do not REQUIRE that lien to be filed at closing....but we have seen a lot of lenders having issues with that since COVID hit.  So we have been filing it at closing ever since to make sure that most lenders could help us with this strategy.  You could find a lender that is ok with filing the lien after closing, but we'd have to know what lender to use...maybe Josh knows someone that will lend in your area that can help with it? But I'm advising everyone to file at closing to help keep as many lenders open to it as possible.  Hope that makes sense.

@Andrew Postel @Josh Norell

Thanks both! My property is located in Philly.
Does filling a lien automatically puts the deed under the LLC? or i have to hire a title company to do it? Is it necessary to have the deed under the LLC? Would like to avoid title companies since they usually cost a lot (ies,. ~$4k+ in Philly just to close).

No, the deed stays in your personal name. You file a promissory note and deed of trust listing your LLC as the lender at the county. It's easiest to have the tile company do this at your initial closing, but you can do it yourself. Though to make sure it's right, it may be worth paying the title company to assist you in writing up the documents your first time. I imagine they'd do this for <$500. Filing at the courthouse is not expensive. It's about $30 in my county.

[Andrew Postell]

@Forrest Hayashi so no, filing a lien does not automatically put the deed in the LLC name. The deed will ben in your name. And if you can figure out how to avoid using title companies to close your transactions just let us know!

[Loid Danga]

@Andrew Postell thanks for such a wealth of information. I am in the process of setting up an LLC that will lend me funds to purchase and rehab the properties. Can i have the LLC owned by me and my wife or it has to be a single member LLC? My wife and I will be on the property title.

[Jorge Ruiz]

@Andrew Postell

Hey there Andrew. When you have a moment you would be so kind as to check your in box. I sent you a question regarding this post.

Thank you so much again for this post.

Jorge Ruiz

[Loid Danga]

Hi all. I am navigating the intricacies of implementing this strategy. I would love to hear from those who have successfully implemented the strategy. What were your pain points and how did you address them?

[Andrew Postell]

@Loid Danga you and your wife can absolutely own the LLC. No problem there at all.

[Loid Danga]

@Andrew Postell thanks

[Joe S.]

Originally posted by @Andrew Postell:

@Ray Thorsen if you file a lien you can refinance up to 75% on a 2-4 unit property under the conditions described in this post.  Thanks!

Could we file a lien after the fact? Also if we close with the hard money lender could we turn around and have our LLC file a second for the rehab amount and then refinance the two notes?

[Andrew Postell]

@Joe S. technically you can. Meaning, Fannie/Freddie don't have a problem with it. However, we have been noticing a lot of lenders will specifically not like seeing it structured that way currently. So the best method is to file it at closing. That will allow you to use more lenders with that structure. And yes, we file a 2nd lien on a HML all the time. It is also a good strategy....that one you MUST file at closing though. 2nd liens are required to be shown at closing to qualify for a "no cash out" loan. Hope all of that makes sense.

[Allvin Dsouza]

@Andrew Postell Thanks for the awesome post and I want to use this strategy on my next purchase. I called couple of banks in Indiana and they say there is a 6 months waiting period if one has to refinance from Hard money to Fannie money. I didnt mention the whole LLC strategy but I am guessing using LLC to fund the transaction and adding to the deed would we similar to using Hard money. Any idea how to make this work without waiting for 6 months?