What is delayed financing and why should you consider using it?
The term “delayed purchase” or “delayed financing” comes from the conventional lending world, and it’s used to describe a transaction where you buy a property in cash and then do a cash-out refinance within 6 months. This is essentially a cash-out refinance without having to wait 6 months of seasoning, but you have to be able to buy the property in cash.
However, the conventional world still treats it as a cash-out, which means that it will cost a little more than a standard rate-term refinance, and your LTV will be 5% lower (75% LTV for SFRs and 70% LTV for 2-4 units). They will also cap the loan amount by your acquisition and closing costs (that are on the HUD when you purchase the property), but theoretically, you can still get 100% financing by doing it this way.
The asset-based lending world doesn’t play by the same rules (and every asset-based lender also does things differently), although the rates are higher (usually in the high 5’s). Even though we don’t have any seasoning requirement for our 30-yr LLC rental loans, I still encourage investors to use delayed financing if they can. This is because we don’t lower our LTVs for delayed finance transactions (but we do for the traditional cash-out), and we don’t increase the rate like we would normally do for a cash-out transaction. We also won’t look at what you bought it for and simply do the loan based on the appraised value.
For example, we have a client who has a free and clear property and wanted to get a loan to purchase a rental property. He was getting a steal; the purchase price is $200k and the property is worth $350k. He’d have to do a quick 2-week cosmetic rehab on the property (paint, carpet, etc) to reach that $350k ARV.
Instead of doing a purchase loan on the new property, we’re getting him a fast 1-week bridge loan on his free and clear property instead (since he needs to close on that purchase loan in 2 weeks), and then use that money to buy the new property in cash. We would then refinance the new property into a rental loan right when he finishes the small rehab. Why? If he had purchased the new property with a rental loan, he’d get a loan at 80% LTV = $160k, which means he’d have to put 20% down ($40k). By doing the delayed financing route, he’s able to get a loan up to 80% LTV on the $350k value, which is $280k, at the same rate. So now, instead of having to put $40k down on this property, he ends up receiving $80k for buying a rental property.