What is Delayed Financing and Why Should You Consider Using It?

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.