Delayed Financing Helps You Grow Quicker

Some real estate investors use cash to purchase their investment properties and there are many advantages to doing so.

If you can make an all-cash offer, with no financing contingency, you are putting yourself at an advantage over other investors or buyers, after all, “cash is king.”

This may also benefit you because it can help lower the purchase price as the seller will have more incentive to accept your offer. Most sellers want their price but all want to close and move on.

Other than using cash as a bargaining chip, there are scenarios or deals that require you to close in cash and financing is not an option.

This is typically the case for properties in foreclosure, being auctioned or any deal that you cannot get access to the inside of the property prior to purchase.

Complete access to the property prior to closing is necessary when obtaining an investment property loan from a hard money or bridge lender since an interior appraisal is required. In those scenarios, you have no choice but to close in cash, or you lose the deal.

It’s usually not ideal to have a lot of cash tied up in a property.

This slows you down or limits the potential of getting another project going. It also adds a bit more risk since you’re 100% equity but, there is a solution that most real estate investors are unaware of. Hard money lenders are able to offer a loan product that is called “Delayed Financing.”

This typically means that within 3-6 months of purchasing a property in cash, you will be able to get the same loan terms as a purchase money loan request, and it’s not considered a cash-out.

You could even start the process with the hard money lender as soon as you get the property under contract. Once you can provide them with access to the interior, they can get their appraisal done, and close quickly thereafter.

Again, a Delayed Financing loan is not seen as or labelled a cash-out refinance, which is a good thing. Cash-out refinances are viewed as a more risky type of loan since you’re walking away with cash at closing but also because you increase your outstanding loan balance and loan-to-value ratio and decrease your equity. When there is more risk, there are more rules and requirements, and the rate is higher. Also, most lenders require seasoning for cash-out refinances. Seasoning means that you would need to wait a certain amount of time before you could obtain a loan against the current as-is appraised value of the investment property. It’s seasoning of ownership and most lenders have a 6-month seasoning requirement for properties that are owned free and clear. Others may even have a 12-month requirement. That slows down growth and holds you back from going after new opportunities. Even if you do not foresee yourself investing within 6-12 months of purchasing an investment property, it’s always wise to have that option available to you in the off chance that a great deal presents itself.

Whether you are buying a turnkey/rent-ready rental, doing a fix and flip or it’s a project that calls for Bigger Pockets buy, rehab, rent, refinance, and repeat (“BRRRR”) strategy, delayed financing is available. In the context of a project that requires rehab or renovations to either fix and flip or rent and cash-out refinance the property, you would be able to pull out anywhere between 75% – 85% of your purchase price and have an additional 100% of the renovation budget held-back to be released to you in draws– as long as that total loan amount is capped at 65-70% of the after-repaired value (“ARV”). Depending on market conditions those leverage ratios can change. At the time of writing this blog, that’s generally the standard. How much you can take out and the leverage ratios you’ll be restricted to/by are determined by the lender’s criteria/requirements and typically are focused on your credit score, experience, the property’s characteristics and the deal’s numbers.

Here are some figures to help outline what a Delayed Financing loan would look like on a fix and flip or BRRRR project (a rehab-to-rent project):

  1. Purchase Date: closed within the last 3 months
  2. Location: Non-rural market, with comps within 3-5 miles of the subject property
  3. Property Type: SFR
  4. Purchase Price: $200,000
  5. Rehab Budget: $70,000
  6. Estimated ARV: $360,000
  7. Experience: 3 flips in the last 36 months
  8. Credit Score: 703

With the above, suppose the lender qualifies you at up to 85% of the purchase price and 100% of rehab/reno costs, capped at 70% ARV. You would start the underwriting process with them. The appraisal comes back and the as-is value is in line with your purchase price of $200,000 and the ARV is $360,000. Here, with an ARV of $360,000, your loan cannot exceed 70% of that, which is $252,000. If 85% of the purchase price and 100% of rehab costs exceed 70% ARV, then the lender typically lowers the initial funding amount (that 85% goes down) by an amount that brings the total loan under 70% ARV (or here $252,000, which represents 70% of the $360,000 ARV). Here’s what those numbers look like based on this fact pattern:

  1. Initial Funding Amount: $170,000 (85% of purchase price)
  2. Rehab Hold-back: $70,000 (100% of rehab budget)
  3. Total Loan Amount: $240,000 (~66.67% of ARV)
  4. 70% of ARV: $252,000

In this hypothetical, your numbers work out great and stay within the leverage ratio limits. If the property appraised lower than your purchase price, then the lender would be lending 85% of the lower purchase price and appraised value. Here, that did not happen, so 85% of the purchase price is the initial funding amount. At closing, you will receive $170,000 minus closing costs. You will also have $70,000 in rehab in what’s called a rehab hold-back. The funds for rehab are made available and you can access them through the draw process.

If you’re able to buy properties in cash you may want to consider speaking to a hard money lender about doing a Delayed Financing. If you’re not opposed to financing, then it may be a great way to limit your risk in a project, by getting a significant portion of your cash back right after you close on the property, and at the same time, it provides you additional liquidity for the renovations and to seek opportunities. After all, cash is king!

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