Strategies For Getting Cash Back At Closing
Getting cash back at closing may sound far-fetched to some people; however, you can actually routinely get cash back at closing.
While it is clear you will get cash back at closing when you wholesale a property, you can also get cash back when buying a property to flip retail, when refinancing various types of seller financing and when refinancing rental properties.
Where Does The Cash Come From?
Some courses or books may give you twenty different ways to get money back when you buy a property, but it doesn’t have to be that complicated. All you need to understand is where the money can come from. Then you can very easily structure your financing technique to the deal’s unique situation, rather than waiting for a deal’s situation to match a very specific finance technique.
So, the cash you get back at closing has to come from somewhere, but where? There are basically only four places it can come from… the seller, money you borrow, a partner or your buyer.
The first source for getting money back at closing is the seller.
Few sellers will ever come to closing with cash and pay you to take over their property, but it does happen on very rare occasions. There are also a lot of hair-brained ideas out there such as getting the seller to refinance and give you the cash, but these things virtually never happen.
Rental Deposits & Closing Credits
One instance when a seller would bring money to closing, is when the seller is holding the security deposits from any tenants that are in the property. When you purchase a property which is already rented out, you as the buyer must get a credit from the seller for the security deposits, last month rent payments, and even current month rent payments. Remember, rent is almost always due at the beginning of the month. So you’ll want to make sure all the regular rent payments are at least prorated as of the date of closing. You could even negotiate for all of that month’s rent. If the property has multiple rental units, these monies can add up to quite a bit, especially if you’re buying a large apartment complex.
Unpaid property taxes will be credited towards your costs, but remember, those taxes must be paid at the end of the year. All of these items are commonly referred to as “Closing Credits” and are credited on your closing statement.
Money You Borrow
The most common way to get cash back at closing when you buy a property, is to borrow more money than is needed to cover your purchase price and closing costs.
Wholesaling To Yourself Or Your Partnership
One of the easiest ways to get cash back at closing is by borrowing money from a hard money lender. These hard money lenders routinely lend out money based on the property’s “after repaired value” and not based on your purchase price.
Basically, instead of wholesaling the property to another investor (who will fix the property up and either retail it or keep it as a rental), you are going to wholesale the deal to yourself. To do this, you simply borrow more money than what you’re buying the property for. After fixing the property up, you would then either keep it as a rental or retail it.
You can wholesale a deal to your partnership. There is no reason why you can’t make a few bucks upfront for finding a deal. If this is the case, make sure your partner knows what you’re doing. Otherwise, they may get upset and feel as though you took advantage of them if they find out after the fact. Just remember never to get greedy and to always be honest.
You may need to use this technique if you are working with numerous partners at one time. For instance, you may work with one partner to find a deal, and then wholesale the property to another partner in which you will work with to retail the property.
Refinancing Rental Property
Another way to get money back at closing that you borrow, is to refinance a property for more than you owe. This is commonly referred to as a “cash-out refinance” or “equity farming”.
These “cash-out” refinance loans can be received through just about any mortgage broker around the country. Realize though, when getting cash-out on a rental property, this is called a “non-owner occupied cash-out refinance”. To get this type of mortgage loan, you must have good credit and the mortgage payments on the loan you are refinancing must have been paid on time every month for at least 12 months or more. The rental income from the property must be well documented.
There are some side-affects to borrowing extra money on a rental property.
First of all, the extra money you get increases your loan balance. This in turn increases your monthly mortgage payment, which reduces your monthly cash flow.
Remember, the objective with owning rental properties is to have a monthly residual cash flow which you can use to become financially free. Everything you borrow must be paid back eventually. This will either be on a monthly basis out of your cash flow, or out of your sales proceeds if you decide to sell the property before the loan is paid off.
Secondly, if you get any money out, the interest rate on your loan will get bumped higher. Usually, the rate bump would be anywhere from a half of a percent, to one whole percent. Realize too, you would also be paying the higher rate on the extra money you borrowed.
Finally, the money you get from closing can come from your buyer. We’re not talking about getting money back at closing when you sell a property you already own; but rather, flipping properties and getting money back at closing. After all, you walk in the door of closing agent’s office not owning the property, and you walk out the door with the property sold and a check in your hand.