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!

[Rick Bracelin]

@Andrew Postell Thanks again Andrew

[Andrew Postell]

@Joseph Holliway sorry I didn't reply sooner.  I do check in here from time to time but if you tag me I will respond right away.

Normally, most investors just ask the title company "what do you need from me to file a lien for me"...and usually the title company states a "Deed of Trust".  I have seen some title companies require a deed of trust and a note.  I can't speak for every title company in every state here so that's why we just ask them what we need. 

Now every title company will draft these items for you...for a fee.   Or you can just google "Free Deed of Trust Examples" or something like that.  You'll find plenty of examples that you can use.

Now, this post is over a year old....so you can actually refinance up to 85% of the value of the property.  Make sure you get prequalified with your Fannie/Freddie lender to make sure this is possible and what the rate implications are to go to 75%, 80%, and 85%.  Your initial lien doesn't have to be EXACTLY that amount but somewhere in that range is reasonable.

Hope that helps.  Thanks!

[Joseph Holliway]

@Andrew Postell 

Thank you for the response. This clarified a lot of things. 

[Keith Linne]

@Andrew Postell - Such a fantastic breakdown of the different scenarios. I plan to use the LLC strategy on my 1-4 unit rehabs moving forward.

A question for you pertaining to 5+ unit buildings. I am currently looking at acquiring an 18 unit apartment building. In this case, I'd be assuming the existing loan (contract for deed with 4 years remaining on the term), and bringing the 20% down payment as a mix of a private capital and my own capital. Being that the size of this property pushes me into the "commercial" world, do requirements vary significantly (do commercial loans have the same seasoning requirements, etc)? A 6 month season on this property wouldn't be the end of the world, as we'll be working to increase rents, etc to increase the property value before a refi (likely 12-18 month process); however, it would be great to hit an 80% LTV (instead of 70% LTV) on the exit side of things to cash out myself and all private money 100% after the value add.

On this deal, I’m assuming the CD balance is eligible for refinance, since it’s a lien on the property; however, in order to make the 20% down payment eligible as well, should that be recorded as a 2nd lien at the time of closing, or is commercial more flexible/a different beast? For example: 

Purchase Price $1,000,000

CD $800,000 balance

Down Payment $200,000

ARV $1,250,000

Refinance at 80/20 = $1,000,000 new loan balance

I would greatly appreciate any insight you may have regarding this side of the lending world. Thanks in advance!

[Andrew Postell]

@Keith Linne sorry, I am not the person to ask any multi-family questions to.  My world is just the 1-4 unit property world.  Try posting that in the multi-family forum though.  That might be the best place to ask for advice.  Good luck!

[Keith Linne]

@Andrew Postell I thought that may be the case - I'll do some digging in the other forums. Thanks again for your expert input in the 1-4 unit space (I focus on student rentals that fall into that category), and for the timely response!

[Tyler Watts]

Each bank is different. Your conservative banks will push back on LTV (basically come in at a lower number) and "claim" your in a commericial setting, but in all reality it's their standards and what they believe is commercial.

I would recommend reaching out to a local bank that you may live near or a local bank near the property. Your bigger banks that are in multiple states will likely be more conservative vs. the local guys. If you have plans to scale beyond this deal, then it's crucial to network to the local banks. Their LTV/LTC will be higher and they will likely want to scale with you where the bigger banks will likely cap you off. 70% LTV is just simply too low unless. If you can't get higher, look to a partner that has more experience than you or someone with net worth that will make the bank feel more comfortable about a higher LTV. They "can" go to 85% LTV. It's not going to come easy, but if you have the right group of people with experience and net worth, it's very achievable. You may have to give some equity, but the network you will build and knowledge you will gain will outweigh the equity portion in my opinion.

I learned this the hard way, but eventually did find a local bank and plan to re-fi everything I have with them this year. Again, I don't know your end goal, but if it's to find more deals then find the bank that st hungry like you are. The less money you have to bring, the more deals you can take down!

[Cooper B.]

This is a great thread.  @Andrew Postell thanks for taking your time to answer all of these questions.  My question is related to qualifying for the Freddie/Fannie loans.  @Alex Zokan asked a similar question to mine so I'm tagging him here as well.

At what point will the rent from the subject property be included in DTI calculations? @Alex Zokan

For example, if it takes 8 weeks from the time of purchase to get a property rehabbed and a tenant in place, will the rental income be factored into DTI calculations when I apply for a conventional refi?

[Joseph Holliway]

@Andrew Postell Hopefully you can help me understand better. I just finished @Brandon Turner book on "How to invest in Real a Estate" and I am trying to understand the DSTC for multiplexes. How does the GRM factored into the appraised value of the complex, and on some of the other forums I read the lower the GRM the better the value for purchase (in short).

[Andrew Postell]

@Cooper B. and @Alex Zokan yes, this is a common area of concern.  If you do need that rental income to qualify, and you are refinancing, you would need an executed lease for that property.  Meaning, they don't have to move in, but it would need to be signed and their security deposit made.  Once you have that, you can count that rental income in the Fannie/Freddie world.

If you were purchasing a property outright with Fannie/Freddie money you don't need a lease at all. Purchases are underwritten a little differently.  No lease necessary when using their loan on purchase.  But when refinancing, you will need a lease....if you need the income to help you qualify. And a good lender should be able to provide that information when you go to get prequalified.  Feel free to ask anything additional.  Thanks!

[Andrew Postell]

@Joseph Holliway sorry, I am not the person to ask any multi-family questions to. My world is just the 1-4 unit property world. Try posting that in the multi-family forum though. That might be the best place to ask for advice for 5+ unit properties. Good luck!

[Manuel Burgos]

@Andrew Postell great post!! How would you structure using a HELOC from your personal residence under the LLC? In other words, how will I lend myself the funds from the HELOC if they are under my name and not under the LLC? Is it as easy as depositing the HELOC funds into the business account? Hope this isn't a confusing question! Thank you.

[Andrew Postell]

@Manuel Burgos I do reference this in the 2nd section of the post. Buying with cash or with a HELOC is the same in this scenario. The important step is filing the lien. Once you have a lien filed the source of the funds is inconsequential. Whether you got the money from your bank account, your HELOC, your auntie.....none of that matters once you have the lien filed. So no need to restructure your HELOC or anything like that. Just file a lien and you are good. I hope this make sense how I am describing this. Thanks!

[Manuel Burgos]

@Andrew Postell thank you man! Makes perfect sense .

[Justin Holley]

@Andrew Postell 

May I record this after closing directly with the county recorders or did I need to do it through the title company at the time of closing?  I believe I can do it after with a mortgage and note, but just want to get your opinion.  Thanks and great post.

[Justin Holley]

@Andrew Postell

May I record this after closing directly with the county recorders or did I need to do it through the title company at the time of closing? I believe I can do it after with a mortgage and note, but just want to get your opinion. Thanks and great post.

@Andrew Postell

Justin Holley

[Andrew Postell]

@Justin Holley thanks for the kind words.  And you can absolutely file this after closing.  Most people just use the title company because it's just simpler but if you want to drive to the courthouse to do it I think you could do it on your own.  I can't speak for every state here but in Texas you need a Deed of Trust. You might want to check to see what the right document is that you need to file a lien. Hope that helps!

[Ray Thorsen]

@Andrew Postell Great post, my question is on 2-4 units since you are referencing changes in single families to 85% What are you seeing in the 2-4 unit space. In your earlier posts you stated 70%. Has that moved at all?

[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!

[Ray Thorsen]

Thanks for Clarifying

@Andrew Postell

[Andrew T.]

@andrew postell thank you for the very interesting post and discussion on here.

I am a new investor planning on using a 401k loan and a credit line as short-term money for my first purchase and then refinance out.

If I understand correctly I could use these funds in my personal name to buy the property in cash... Then file a lien under my llc's name for the purchase price plus the estimated rehab (at 0 interest)?

If so then presumably I would be able to get an immediate refinance for up to 75% ARV?

Is that the gist of it?

[Dave Chow]

@tyler watts, why would you refinance everything ? Once the convention loan reaches 10 , which way is better ? Keep all the current loans and buy any new units with commercial lender ? Or refinance the 10 units with commercial lender and then use conventional lender starting from unit 0? 

Originally posted by @Tyler Watts:

Each bank is different. Your conservative banks will push back on LTV (basically come in at a lower number) and "claim" your in a commericial setting, but in all reality it's their standards and what they believe is commercial.

I would recommend reaching out to a local bank that you may live near or a local bank near the property. Your bigger banks that are in multiple states will likely be more conservative vs. the local guys. If you have plans to scale beyond this deal, then it's crucial to network to the local banks. Their LTV/LTC will be higher and they will likely want to scale with you where the bigger banks will likely cap you off. 70% LTV is just simply too low unless. If you can't get higher, look to a partner that has more experience than you or someone with net worth that will make the bank feel more comfortable about a higher LTV. They "can" go to 85% LTV. It's not going to come easy, but if you have the right group of people with experience and net worth, it's very achievable. You may have to give some equity, but the network you will build and knowledge you will gain will outweigh the equity portion in my opinion.

I learned this the hard way, but eventually did find a local bank and plan to re-fi everything I have with them this year. Again, I don't know your end goal, but if it's to find more deals then find the bank that st hungry like you are. The less money you have to bring, the more deals you can take down!

[Andrew Postell]

@Andrew T. you have it correct! Doing it this way means you don't have to wait to refinance your money back.  Feel free to ask anything additional.  Thanks!

[Tyler Watts]

@Dave Chow not sure I  understand your question but for my personal goals, I want to scale and grow and refinancing properties is a way to do this. Not the only way but I purchase properties and rehabbed them to where I have significant equity. The way I look at it, it doesn't help you if you don't cash it out. if the property is performing correctly it will carry the mortgage all the while pulling basically cash out to put into further deals. Essentially I have ZERO dollars in on a fully stabilized asset and I pull out money to put into future deals, why wouldn't you do that?

Depends on yours goals, I don't mind having debt right now. If that is a person's goal, why wouldn't you re-fi?

[David Venancio]

@Andrew Postell

Great post thank you, quick question I recently bought two duplexes in Milwaukee under an LLC – we bought them with cash and are now trying to put get the cash back from with a loan and one local credit union is saying they don't lend to an LLC. Is that just this credit union, or is that common – would really like to use them as they are very investor friendly.

Thanks again David