How to avoid the 6 month no cash out period?

Question

So I have been looking a wholesale properties to remodel and rent after. I was thinking about different ways to avoid the 6 month period in which one has to own the property for in order to refinance cash out. Here are my thoughts:

Buy the property on my name. Sell the property to an LLC of my own

Buy the property on an LLC name. Sell the property to an LLC with two partners (one of them being my own)

Buy the property with an NV or NM LLC (partners are not public information). Sell the Property to my Arizona LLC

Buy the property under a friends name. Sell the property to myself

What would you think about this? Or do you have any other good legal way of doing this?

River Sava · Answer

Some DSCR lenders have under 6 months of seasoning. Have you explored those options?

Brian Fung · Answer

The most important thing is to work with lenders that legitimately have a "No Title Seasoning" requirement. With this type of structure, as soon as you are done with the work completed, you submit the budget for the purpose of rationalizing the massive increase in value in a short period of time rather than leveraging it in an LTC calculation that will cap your cash out proceeds. All you need to do is find a lender that understands and specializes in working with BRRRR method investors that flip at scale and at speed. If you don't flip your properties in <3-6 months, then you technically don't need a no-seasoning lender in the first place.

I hope this helps! Aloha!

Erik Estrada · Answer

You would not be able to avoid the seasoning period doing multiple transactions since the sale would need to be recorded. Lenders will use the date the sale was recorded to determine the seasoning time period.

There are DSCR lenders that do not have a seasoning period to use the new appraised value, however you will need to verify work was completed to improve the value of the property. Some lenders may require a second appraisal, if the value is over 20% of the initial cost.

You can also wait 90 days to use the new appraised value on a DSCR loan without stringent requirements. However, lately I have been seeing appraisals come in lower than anticipated so be prepared for a value cut (Subject to your market of course)

Lastly, you can do a delayed purchase and use 100% of the initial cost so as long as the loan amount does not exceed 75% of the new appraised value. Cost will include purchase price + Rehab cost.

Stacy Raskin · Answer

You can do a cash out refinance on the new appraised value after 3 months.

I've seen lenders do with no seasoning but there can be more documentation involved with showing what work was done, receipts, etc. There are less lenders who do this and the rate and fees will usually be higher.

If you're thinking about using a DSCR loan-more info below:

DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further.

Robin Simon · Answer

Hi - people certainly do utlize strategies like this - however, as other commentors have noted - DSCR Loans have emerged as an LLC-friendly and short-seasoning-friendly option for BRRRR investors that allow you to do everything by the book and not have to worry about a lot of this.

Sharing this article I wrote last year on BiggerPockets on this topic - financing options for BRRRR strategy and pros/cons of each

https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...

Andrew Syrios · Answer

What you're talking about is borderline fraud. I would definitely not recommend this. Indeed, usually by the time you've rehabbed and rented a property and gone through loan approval, it's already been 3 or 4 months. But if you have a good relationship with a bank, they may be willing to wave such a seasoning requirement to just as soon as the property is rehabbed and rented (we have a few that are willing to do this). There are also some DSCR lenders who don't require 6 months seasoning.

Austin Clarence · Answer

The easiest way would be to leverage a DSCR loan. Many DSCR loan products offered do not have a seasoning requirement. Most do, but there are some options out there and they will look fairly similar to conventional.

Jay Hurst · Answer

we have a no seasoning product, but it does not involve moving shell gam you are proposing. The LLC does nothing as lenders simply look on who owns the LLC.

Colin McMahon · Answer

Hey Alvaro!

Like Erik said, its pretty difficult to bypass the seasoning period, and quite frankly you benefit more from the seasoning period than without. When purchasing a BRRRR property, it's super likely that at least some of the neighboring homes will be in less-than-ideal condition so you want to give it time for those models to go under some rehab hopefully and appreciate which will help your appraised value at the end of the seasoning period so you can maximize your cash-out.

If you have any additional questions - feel free to reach out!

How to avoid the 6 month no cash out period?

How to avoid the 6 month no cash out period?

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