All Forum Posts by: John Lee

@John Lee lot's here so let me help some:

1. Creating an LLC and funding it - this is inconsequential to taking money out of an investment property.  I can't speak for every lender here but I have never spoken with a lender that would care about this.  It would neither help nor harm you receiving a refinance.
2. Refinancing with less than 6 months - now this is going to be dependent on your loan type.  Fannie Mae and Freddie Mac are the loan types that have a lot of rules to this sort of thing.  However, if you were receiving a portfolio/commercial type of loan then those lending rules will be decided by the bank itself....since it comes from their portfolio of funds.  So you should ask the lender that you are prequalified with what their rules are and what type of loan you will receiving.  If you aren't prequalified, then please do so.  It should be free to do so.
3. Fannie/Freddie - now if you are doing a Fannie/Freddie type of loan and you want to know all the rules and how to properly structure your purchase I wrote an entire post on this topic HERE

Hope these help but feel free to ask anything additional. Thanks!

Hey John,

A couple things here:

- Why are you creating an LLC to lend to you personally? I'm not a tax or legal professional, but I don't know of any tax or liability advantages to going this route. Either you should fund the LLC and then purchase the property in that LLC (if you want the LLC to own it). Or just fund the deal personally and buy it in your name (if you want to own it in your personal name). In terms of which way to go, I would talk to a good tax professional and a good attorney, and also refer to my next point...

- Some banks will only lend to LLCs (these are the small banks, often referred to as portfolio lenders). Some banks will only lend to you personally (specifically if you're trying to get a conforming/conventional loan). You should figure out which type of bank/loan you'll likely be dealing with, and then hold title to the property in the entity that you will likely be trying to get funding with. If you'll be working with a bank the lends to LLCs, hold the property in an LLC. If you'll be working with a lender who will only lend in your own personal name, then you probably want to buy in your name.

-  In terms of how much the bank will lend, again it will depend on the type of bank and type of loan.  But, GENERALLY, you'll find that a lot of banks will require 6 months of seasoning (meaning you'll have to have owned the property for 6 months) before they will lend based on a new appraisal.  Before 6 months, they will lend based off the purchase and renovation costs (or maybe just the purchase costs).  That's a general statement -- you may be able to find banks that have different rules.

@Adam Bradley

This is a bit lengthy but ready through as it is very informative. I am looking to doing option #3.

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).

• Conventional Loans limit your cash out on an investment property to 75% of the “After Repair 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 ofownership 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.