Cash + Rehab + Rent + Refi Strategy

[Leo B.]

I'm interested in using this strategy for building my portfolio of buy and hold properties. For example, purchase a SFR for 50K cash, put in 20K for rehab costs (ARV of 100K), rent it out to a tenant for cashflow and then refinance 70% LTV for $70K cash out. Rinse and repeat. I have several questions that come to mind that I'm hoping to get some answers on from the board.

1. Will lender require seasoning?  If yes, what are the typical time periods?

2. Are there any lenders that don't require seasoning?

3. If property is purchased cash with equity in place (ie. $70K purchase price and $100K value), will lender perform a cash out refinance right after the purchase?

4. Will portfolio lenders perform a cash out refinance on 5 properties at the same time?

5. Are the LTVs for cash out refis different on SFH versus MFD? If so, what are the typical LTVs for each type?

Thanks in advance for your replies.

Best,

-Leo

[Mike H.]

You're probably right on the hard money lender aspect of the strategy I'm using. If you're first starting out, he can be a little trickier to find a hard money lender that will lend you 100% of the purchase and rehab costs.  That being said, there are still some that will do it.

Interestingly enough, the other thing I've found is that the lender is more apt to do it if a seasoned investor they know vouches for the person and the deal.  So I would recommend you buddy up with a local investor near you that is using hard money and see if they can't give you an introduction and also review your deal for the hard money lender.

Ultimately, the hard money lender's real fear is that a new investor simply doesn't know their numbers quite yet.  But if you can have a seasoned investor review the deal and the rehab, that might give you enough of a bump to get them to do the loan at 100%.

RE: CASH OUT REFI VS RATE/TERM REFI

I would definitely suggest that these two, technically, should be the same thing. But the reality is that conventional loan limits only allow you to do cash out refi's if you have 4 or less mortgaged properties. After that, you can't get a conventional cash out refi.

So after 4, you're pretty much limited to the commercial/portfolio loans from local banks. And while you'd think it wouldn't matter whether they're doing cash out or rate/term as long as the LTV is under their guideline, the reality of it is that banks - especially banks that are going to be holding the note - deal in "layers of risk".

And cash out refi paper/loans are considered and have been shown to be one of the more risky loans that banks will do in terms of investment property loans. At some point, they're being audited on their loans by outside agencies as well. And the auditors tend to look at those loans a little different too.

So while I know that some banks will do the cash out refi's with no seasoning. Not as many as you'd like. And even on the ones that do them, I think their lending decisions have a bit of a red flag mechanism where if they see you doing a bunch of cash out refi's, at some point, they're going to wonder if you're overleveraging yourself and taking all the equity out of the business.  If they do, then they decide not to lend anything more to you which is the real fear.

For me, I try not to take any cash out of my deals on the refi.  Every once in awhile, I will though just to help reset some of my finances and cover some of the out of pocket costs I've had paying the hard money fees and closing costs on my deals.

At the end of the day though, if you can find a deal where the purchase and rehab comes in at 70% or better of the ARV, you can essentially pick yourself up a house for about 4k to 5k out of pocket (assuming a typical bread and butter 100k loan). And I don't see how you can go wrong picking up a 140k to 150k house for 4k or 5k that should kick off a gross monthly profit of 400 to 500 per month.

Ultimately, thats how someone with a modest chunk of capital can grow a very nice portfolio and build a really nice stream of income and a ton of net worth. I started with a 43k HELOC and just got house number 40 under contract yesterday - all in 7 or 8 years.

If there's any other investing vehicle that can do something like that with so little capital, I'd love to hear it. And, believe me, I know that there's a lot more work in this than any other investing type as well.  But for us middle class folk, I truly believe that investing in real estate is the one remaining way to build some true wealth.  Just need to be willing to put in a little elbow grease to do it. :-)