HELOC to purchase, how to get money out and long term finance?

Question

Hello. We are getting ready to invest into a turn-key or a small rehab in the spring. It maybe local or maybe somewhere in the Cleveland area. For now we want to pay down some left over debt. We do have some cash and also a HELOC for close to $100,000. I'm trying to find a long term financing option that would let us pay off the HELOC after the seasoning period. So far it looks like conventional financing is out of the question. If we utilize the HELOC up to $80k I doubt any bank would be interested. Not to mention that our last two years tax returns are not very good at all. Our credit score is around 750 right now. Also, if we do decide to go with a rehab I will be doing most of the work myself with some help, so I will not be having any W2 income for the time being.

Do you guys have any ideas for financing? Preferably, we would like to get a 20 or a 30 year mortgage on the property that would still let us cashflow every month, and not haunt us with a balloon payment in 10 15 or 20 years. Is there such a product available from any buy and hold private money lenders? I saw some ads for them here but would like to hear your feedback before talking to anybody.

Jorge Ruiz · Answer

Jake Recz hope the following helps. #2 is a strategy I plan to implement starting in the next few months. I found this on another bigger pockets post from another BiggerPockets member. I will paste it here: 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). • ConventionalLoanslimityourcashoutonaninvestmentpropertyto75%ofthe“AfterRepair 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 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.

Jorge Ruiz · Answer

@Andrew Postell thanks for sharing it for all of us to begin with. I had forgotten where I'd seen it. Jorge

Andrew Postell · Answer

@Jorge Ruiz thanks for sharing my previous post (I've included the original post HERE).@Jake Recz I feel that the crux of your equation is that you cannot qualify for a conventional loan right now. If that is the case then you may not need to use the strategy that I posted. Essentially if you are using a "portfolio" loan or "commercial" loan then the bank itself calls the shots on that loan type. And those types of loans will sometimes have a waiting period and sometimes not. A "portfolio" loan is a loan that comes from the bank's own money....their own portfolio of money...thus the name. And since there are 15,000 banks in the US, in theory, there are 15,000 different portfolio loans. So is there a product for you? Very likely. There are some portfolio loans that will lend with no income at all. But on any of these portfolio loans they will have different terms and conditions. My advice would be to call banks local to the property...start with small banks and work your way up to mid-sized banks...and tell them you are looking to refinance a property. I would highly suggest to have the property finished entirely before starting the loan but when you call banks your "scenario" is with a completed property. Then learn about pre-payments, the rate terms, the "Loan to Value" needs, etc. When calling smaller banks don't be surprised if you have to call 200 banks to find a loan that is suitable for you. A mortgage broker might also be a good place to start as well.Hope this helps!

Jake Recz · Answer

Wow that was a ton of great information guys! Thank you! Those two posts pretty much summed up and answered all the questions that I had so far. Now I have something to work with. My bank gives me the option to lock in the APR on the HELOC. At exactly what rate, and what term, I am about to find out. Still, the HELOC is only a tool to purchase and I would want to reuse it again and again. It appears that I need to either get on the phone with the small banks to find out what kind of product they offer that would suit me best, or contact a mortgage broker.