Increasing investors returns with reduced cash flows:
Here is a quick strategy to increase your investors cash on cash return. Fannie Mae allows borrowers to purchase investment properties with cash and begin the “cash out” refinance process the following day using the appraised value. For example say you find a home listed at $150,000 that needs new flooring, paint and general clean up ($8,000 worth of repairs). Once finished it appraises for $180,000. Your borrower can refinance and pull cash out based on $180,000 value. Here is a quick example:
Option 1 – Traditional Method: If your buyers purchased the home for $150,000 put down 25% ($37,500) + $8,000 (repairs) their investment would $45,500. Assuming the property provides a $200.00 per month positive cash flow their cash on cash return would be 5.24%
Option 2 – Fannie Mae Cash Out Method: If they bought the home for cash ($150,000) put in $8,000 (repairs) their total investment would be $158,000. They refinance based on a $180,000 value and take a new loan out for $135,000. Their total cash investment in the home is only $23,000 vs.$45,500. Their cash on cash return with the same $200.00 per month is 10.4%.
With rental properties generating much less cash flow than what we were used to seeing in 2011 and 2012 this is a creative way have the numbers make more sense while offering buyers a higher cash on cash return.
Note – The argument could be made the monthly payment is higher in option two; however, most often this is offset by the additional income the $22,500 is earning elsewhere.