Summary: Delayed financing is a type of financing that is used by some of our students as part of a strategy to lock up deals in a competitive market. In order to take advantage of these loans, you should understand the rules as well as limitations of these loans before implementing this strategy. As you can see below, doing the right thing can lead to success.
If you’re in a seller’s market or a hot property comes up and you’re expecting a lot of bidders, one way to lock up a deal like this is to buy the property in cash. The downside of this is the part about using cash to lock up the deal. You need to have lots of it and not all of us have that type of cash lying around.
Assuming you do have the cash, if you’re a savvy investor who understands the power of leverage, you’re going to want to get your money out of the deal and fast. So what options do you have? Let’s take a look at delayed financing.
Before we dive into delayed financing, let me give you the bottom line on this article::
- If you pay for a property in cash, delayed financing is one way to get your money out of the deal
- Investors could use cash + delayed financing as a strategy to win more deals in a hot market
- If you are going to implement this strategy, you should understand the requirements and limitations of delayed financing
We recently bought a home that we are using as a short-term rental, which we covered in a prior article.
One thing we didn’t cover in that article was the buying process: our offer, how we beat out multiple bidders and getting a loan on the property.
The Winning Offer
An underpriced and highly sought after property is available. It’s the perfect situation for a bidding war.
And that’s exactly what we had. In the end, there were 8 offers on the property.
We wanted the property, so we went aggressive on price, but we also pulled out something that we knew none of the other buyers had, an all cash offer.
Cash offers are extremely attractive to sellers. If you’ve never sold a property it might be hard to understand but cash usually represents a “sure thing.” An offer that requires financing is still in limbo until the day the lender gives you the loan. Another great thing—cash also gives you the opportunity for a fast close, something else sellers love.
So we offered the highest price ($5,000 above the next highest offer), all cash and a 10 day close.
Now that we purchased the property, the next step was to get our money out of the deal. For us, we like to use debt to help us grow our wealth. The more money we have in our pockets and not tied up in properties, the more properties we can buy.
We used delayed financing in order to get money out of the deal.
What is delayed financing?
Delayed financing is simply the process of getting a loan on a property that you bought with cash in the last 6 months.
As you can see in our example, we bought the property for $660,000, and immediately after purchase, we started the process of getting a loan for $495,000 or 75% of the purchase price.
What do I need to know about delayed financing?
If you are going to use delayed financing as part of your strategy to lock up deals, there are several things you should know about them. Note: The following list isn’t comprehensive. I focused the list on the items that I think are most relevant to rental property investors.
- This type of financing is specific to agency loans, which are loans backed by Fannie Mae and Freddie Mac. Other lenders might offer something similar and they may even call it delayed financing but for the purposes of this article, I’m only going to focus on delayed financing backed by Fannie/Freddie.
- The loan amount is based on the purchase price, not the value of the property after renovations. So for example, let’s say that you buy a duplex for $250,000 and you invest $50,000 to renovate it. We’re assuming the property is a $400,000 value after renovation. If you were to apply for delayed financing, your loan amount will be based on the $250,000, not the new $400,000 value.
- For investment properties, you can borrow up to 75% of the purchase price for a single family home, 70% for a 2-4 unit
- The purchase must be an arms length transaction. In other words, you can’t have any familial relationship with the seller.
- You must purchase the property with cash, and without loans.
- There are limits to how much you can borrow with a Fannie/Freddie loan. The reason is, these loan amounts vary depending on the location of the property. You should get the exact amounts from your lender. To give you an idea, below is a table of current loan limits based on where your property is located.
Current Loan Limits
Lower 48 States:
1 Unit – $548,250
2 Unit – $702,000 (Duplex)
3 Unit – $848,500 (Triplex)
4 Unit – $1,054,500 (Fourplex)
Alaska and Hawaii:
1 Unit – $822,375
2 Unit – $1,053,000 (Duplex)
3 Unit – $1,272,750 (Triplex)
4 Unit – $1,581,750 (Fourplex)
As you can see, there are a number of rules as well as limitations with these loans. We have known a few students of our Zero to Freedom Course who have used the cash + delayed financing strategies, having to navigate around some of these rules/limitations.
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