Requirements for cash out refinance?

Question

I am finally taking the plunge into real estate investing. I am going for the BRRRR approach. I will not be able to put down 20% but still qualify for up to a 450k loan (I was slightly modest with my income) I found a duplex with tenants for 350k in a very up and coming area. So after I do some upgrades/updates and the value goes up, how do I refinance and pull out cash for my next investment?

Andrew Syrios · Answer

Generally you just need to find a bank that's willing to lend to you (it will usually be a community bank). Two key things to ask about:

1) Are they willing to do a "cash out refinance" or just pay off a loan that's already on the property?

2) Will they loan on appraised value or only on the cash you have into the property? You need it to be appraised value and many banks have a "seasoning" period of somewhere between six months and two years that you will have had to own the property before they will refinance at appraised value.

Christopher Soos · Answer

@Jason D. Okay great so I do have some options. Thanks so much for all of the helpful info.

My wife and I love St. Pete by the way!

Kent Nielson · Answer

I know for single family you can just put 10% down and buy it as a "vacation home" You just can't use rental income to qualify. You would have to rely solely on income from your job.

I'm not sure if that route will work on a duplex though...

Also I hear quite frequently to ask if the seller is open to seller financing.

Matt J. · Answer

Hi Christopher,

One of the seasoned lenders on here can do a much better job of explaining this than I can, but I will pass along some information we've gathered on conventional financing.

As of today, Freddie Mac will lend up to 75% LTV (loan to value) on a 2-4 unit investment property (meaning you don't live in any of the units) for the initial purchase and up to 70% LTV on a cash-out refinance. That means you need to come up with 25% for the down payment plus closing costs (typically 2-4% of the value). Then, when you refinance it to pull out the cash in six months (loan "seasoning" time required by many lenders before you can refinance), you need the property to appraise for considerably more than the initial purchase price plus what you have into it and you'll pay another set of closing costs.

To get a quick idea, calculate: (initial purchase price + rehab costs + purchase closing costs + refi closing costs) / 70%

That will tell you for about how much the property must appraise to extract your down payment, rehab costs and both sets of closing costs, leaving none of your own cash in the deal. Keep in mind this is a quick calculation. You likely will buy down a little bit of the principal during the six month seasoning period. Also note that your monthly debt service will increase, as you are borrowing more money.

To get a better idea, use the BP calculators. They are far more sophisticated. You might also consider non-conventional lending options.

For more on the conventional options, see Freddie Mac LTV Rates and Understanding cash-out refinances.

Nicholas Covington · Answer

@Christopher Soos hello!

There are many ways that you are able to pull out your money for your next deal. The easiest, in my opinion, is going to be cash out refinance. Though at max you would be able to cash out between 70-80% from the home. With the current numbers, I worry that you would not have enough equity in the home for some time to get your money back.

I am kind of confused on your method of BRRRR though if you are not going to be putting down more than  20% do you plan on living in the other side of the duplex and "house hack?" The key thing for BRRRR is finding a good deal where the numbers make sense, putting up your own funds and then refinancing them out. But if you are not putting more than 20% down then there will be no room for you to refinance to take funds out.

Jason D. · Answer

@Christopher Soos you would have to speak with your lender about acceptable ways to borrow the downpayment. The seller holding a 2nd position on the down payment could be an option, if the bank allows it

Is there enough equity after rehab to do a BRRRR? Then you could get a hard money loan, but still looking at 10% down at the bare minimum.

Private money could work, if you have those resources available to you.

Seller financing is another option.

Christopher Soos · Answer

@Jason D. Okay that makes sense, thank you for that piece of information. So should I start looking into private and hard money options, or possibly pulling it out of my 401k?

What other types of options are there for someone who doesn't have that cash on hand yet?

Jason D. · Answer

@Christopher Soos 3% only works if you plan to live there. If there are tenants and you have to keep them (on a current lease) you'll need 20%.

Christopher Soos · Answer

Hey guys and thanks for responding. I am waiting on more specific information on the property but doing my own research on a few free public websites it looks like the property is already worth around 460k I am aiming way lower in hopes that is at least worth 400k.

I haven't purchased a house since 2010 and I think I put 3% down back then, I            assumed/hoped that with excellent credit you could still do something like that?

Thanks again and I'm sorry for my lack of knowledge on this subject.

Jason D. · Answer

@Christopher Soos first, if you dont have a downpayment, what's the plan to purchase? And lender is going to require a downpayment.

After you purchase it, do your rehab to raise the value, you simply apply with a bank for a cash out refinance. They'll do an appraisal and loan you up to 75% or so of the new value. With that, you pay off the old loan and keep what is left over

Requirements for cash out refinance?

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