Mortgage to Myself and Refi?

Question

I read on a forum in BP once about writing a mortgage to yourself (buying a property for cash) so that you can immediately refinance and essentially recoup your down payment plus possible rehab costs depending on what you loaned yourself to begin with. Does anybody have more information on this? I searched for the post but couldn't find it.

Andrew Postell · Answer

@Seth Greenfield are you talking about this post HERE?

Matt Hurley · Answer

@Seth Greenfield same, I funded my LLC in a similar fashion but I haven't bought any properties in cash yet. Definitely make sure it goes through an escrow officer per @Albert Bui's recommendation. Keep us updated as you work your way through this strategy, would be curious how it pans out for ya!

Albert Bui · Answer

I usually push the limits of creative strategy but there is a fine balance between creativity and fraud so since im a lender I want to make sure I follow all applicable rules while still achieving a strategy.

This strategy has been on my roster of guinea pig testers (not yet). I have a few other strategies with land contracts, subject-to's, lease + option strategies and more that I have yet to try.

One of the hard parts of finding a case to work with is that not many people use creative financing strategies or understands how to work with them. Often times there is a lot of explanation to the loan underwriter on these scenarios.

Seth Greenfield · Answer

@Matt Hurley @Albert Bui I definitely appreciate the input! Do either of you have experience doing this? Just curious about how difficult it is to do. If I pursue this further I’ll try to find a RE lawyer to help me navigate it.

Matt Hurley · Answer

@Albert Bui good point, as long as you’re going through the purchase per normal, creating all the correct documents, and treating the sale as if you weren’t funding it yourself, should be fine :) @Seth Greenfield you’re smartest move is to discuss all this with a RE lawyer. Make sure you’re not only staying within federal, but your state laws.

Albert Bui · Answer

Sure as long as its legit and money actually flowed from the LLC into escrow to close and you personally brought in the equity from your personal checking/savings.

If the loan from the LLC mortgage note & deed exceeded the purchase price to cover rehab, carry, etc that could work too in theory.

This means the LLC holds the note, ideally 75% of the ARV or less so that way you have sufficient equity to refinance the entire note back to your LLC (aka "you").

If done wrong its mortgage fraud.

Matt Hurley · Answer

Most start by funding their LLC the way you describe it (that's how I did it). You fund your company with personal cash or by other means (investor etc.), then use the LLC to purchase the property or just use the money as a repair fund. Then re-finance in your name and quit claim deed the property back to the LLC (make sure your mortgage doesn't have a due-on-sale clause), or re-finance with a commercial loan using your LLC.

You're just funneling your $'s through your LLC, as one should be doing to protect yourself. If you want to take the money out of the property on refi and put it back in your pocket, go for it. Since an LLC is a pass through entity in the eyes of the IRS, it doesn't really matter if you take the cash out after refi and "pay yourself", or leave it in the LLC.

Seth Greenfield · Answer

Your llc acts as a bank

Seth Greenfield · Answer

@Matt Hurley the difference being you creating an llc to borrow your own money from. You buy it with cash but instead of owning it outright you create an llc you put your cash into the llc and borrow the cash from your llc. Then you refinance with a bank immediately. It’s kind of hard to explain. I’m familiar with BRRRR and it is a form of that only it lets you recoup costs you would typically have to use a cash out refi to get. Hope that makes sense

Matt Hurley · Answer

Sounds like a pretty standard BRRRR method. What specific information are you looking for?