Tuesday, December 6th, 2016

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Rehabbers: Using Your Own Cash? Danger!

So I just learned something salient I think you should really be aware of if you’re not already.  Especially if you’re considering a cash-out refinance at some point in your future.

If that’s you, then danger, Will Robinson, danger!

Here, listen to this…

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It’s a short snippet from my  “Super Sexy Mortgage REI Market Update” podcast interview with my genius mortgage sherpa friend.  He’ll explain the whole thing for you in under 8 minutes or so.

Side Note: Have you heard the whole podcast episode yet?  If not, you should. It’s full of important, current-market stuff you should really know.

The Cliff’s Notes…

Let’s say you’ve borrowed hard money or private money for your first few deals.  And now you’ve socked away, say, $100,000 or so, and you’d like to stop forking over those blasted points. Sure thing.

So why don’t you start leveraging some of your own cash in your rehab deals instead?  Hmmmm… Kinda makes sense…

  • Question: Any real downside to this?
  • Answer: Yes. Maybe. Kinda depends really.

If you’re fixing and flipping only, then no worries. Use your own dough.

But the deal is, if you already own 4 investment properties, you can forget about getting cash back on a 30 year fixed refinance anymore on deal #5 and higher.

Yes, once upon a time (just last week it seems) this was normal and easy-peasy. Whether you owned no houses or 5 houses or 9 houses or whatever, you could find a good deal, use your own cash for purchase and/or rehab, then refi into a 30yr fixed and pull your own money back out for the next deal.  All day long.

But things have changed. Nowadays they simply do not allow cash out anymore on investment property #5 and higher.

Any solution?

Why yes…

On deals 5 and higher, the banks don’t want to let you walk away from the closing table with any cash back (which they define as at least $2k or 2% of the loan amount in your pocket). But they’ll pay off liens all day long, right? After all that’s what a refinance is for.

So if you’re planning to refi on deal #5 or higher, you gotta either:

  1. Borrow hard/private money and just consider it the cost of doing business,
  2. Or find another legitimate way to have a lien in place.

Other tiplits…

Now in response to Jason’s advice, I also suggested that if you’re borrowing Aunt Sally’s money for your rehab, be sure you record a legitimate lien on their behalf, or you won’t get her money back when you refi either.

To which he responded that you should really try to ….

1) Make the lien for a company (not just your aunt/uncle if possible)
2) Write the note with monthly payments due (and actually make those payments)
3) Make payments from your personal account (rather than your biz account)

So…thoughts? I’d love to hear ’em.

Also, I definitely recommend you download and listen to my entire “Super Sexy Mortgage REI Market Update” podcast episode with Jason.


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JP Moses is a roughly-hewn man-child who first got into REI after reading Rich Dad, Poor Dad back in Y2K and went full time in 2002. He's tinkered in everything from landlording to short sales to rehabs to Realtoring to REOs to notes to owner financing, blah, blah, blah...Till he finally stuck his flag deep into wholesaling and has since flipped somewhere north of a couple hundred deals.

JP's not a “guru” but also doesn't think it's a bad word. Among his core values are authenticity, creativity, big honkin' value, general fun-ness and being unshaven. He's super proud to be chief blogger guy at REItips.com and host of the free REIology podcast. He also thoroughly enjoys sharing his 53 best real estate investing forms with anyone who wants them. You should totally check that out. :-)

  • It is my understanding that before getting that 30 yr fixed refi on a >4th property, you would also have to have a 720 or higher credit score and 6 months cash reserves on EVERY property.  Has anyone found otherwise?

  • Hi, Dennis.  I believe you may be right.  You’re gonna want to hear my full interview with Jason. He goes over EVERYTHING you need to know currently about the REI mortgage market right now.