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Delayed Financing

Last updated: May 2, 2024

Delayed Financing

What is Delayed Financing?

Delayed Financing is when you purchase a home with cash and then quickly implement a mortgage to recoup most or all of the cash invested into the property. Many homebuyers use delayed financing in order to outcompete buyers in the market that are reliant or even contingent on financing. This strategy certainly comes in handy during times like these where housing inventory is limited and sellers want a fast, certain transaction.

Since most DSCR lenders only offer a maximum of 80% LTC (loan to cost where cost is equal to purchase price plus verified rehab) for delayed financing, it is not a commonly utilized or discussed option among even highly experienced rental property investors -- especially if you're looking to recoup all of your invested capital so you can re-use it in your next deal, a la BRRR method.

What many rental property investors do not realize, is that delayed financing, also known as "delayed purchase financing", is an excellent tool and strategy to build your portfolio and recycle your capital.

Every day, rental property investors request DSCR loans from OfferMarket that technically utilize delayed financing. These investors purchase 1-4 unit residential investment properties in cash, conduct efficient rehab, and then refinance with no seasoning -- often well within 90 days of their cash purchase. While we commonly refer to this as a cash out refinance with no seasoning, it is actually delayed financing, and arguably better in most scenarios.

Pros and Cons of Delayed Financing

Delayed Financing Pros and Cons

No seasoning: you do not need to wait 6 months or even 90 days from the date you purchased the property in cash. You can implement a delayed financing DSCR loan with no seasoning whatsoever.

Types of transactions where delayed financing is used:

  • auction or sheriff sale: auction services require or strongly prefer cash buyers with no financing contingencies
  • wholesaler assignment: wholesalers require or strongly prefer cash buyers
  • off market / private sale: instead of listing a property on the MLS with a brokerage -- time-sensitive sellers, estates, distressed sellers, tired landlords, will accept a cash offer below market value to avoid hassle

Purchase transaction LTV: your DSCR lender will order an As Is appraisal and lend up to 80% LTV -- that is loan to value, not loan to purchase price. So, if you purchased the property below market value, let's say because you offered cash in an off-market transaction, and/or you renovated the property with your own cash after your purchase, then the value of the property may well be significantly higher than what you paid for it.

Delayed Purchase Cash Out Refinance
Max LTV 80% 75%

Property occupancy: delayed financing utilizes the same guidelines as a purchase, therefore a single family rental property can be vacant at the time of funding and there will not be a haircut (reduction) to LTV. In other words, the property will be eligible for max LTV, all else equal.

Leased Units: Delayed Purchase Leased Units: Cash Out Refinance
Single family 0 of 1 1 of 1, -5% max LTV if vacant
Duplex 1 of 2 2 of 2, -5% max LTV if vacant
Triplex 2 of 3 3 of 3, -5% max LTV if vacant
Quadplex 3 of 4 4 of 4, -5% max LTV if vacant

Here's a more concrete example:

  • Purchase price: $80,000
  • Verified rehab: $20,000
  • As Is Value: $135,000
  • Loan amount: $108,000 (80% LTV)

Purchase transaction interest rates: the interest rate for 75% LTV purchase is nearly 0.5% lower than a 75% LTV cash out refinance. The table below illustrates this concept:

Purchase Cash Out Refinance
80% LTV 8% N/A
75% LTV 7.625% 8%
70% LTV 7.5% 7.625%

Delayed Financing vs Cash Out Refi

Delayed Financing is essentially a cash out refinance that happens within 180 days of the cash purchase of a property. The key limitation with a delayed purchase, is that there is typically a maximum loan to cost imposed.

Here's an example where the delayed financing loan amount is limited based on cost:

  • Purchase price: $80,000
  • Verified rehab: $20,000
  • Cost basis: $100,000
  • As Is value: $200,000
  • Maximum cash to borrower on settlement statement: $100,000
  • Maximum loan amount: $100,000 + closing costs (~$108,000)
  • 80% LTV: $160,000
  • 75% LTV: $150,000

In the example above, the investor bought the property deeply below market value and cost effectively rehabbed the property. Unless they wait for 180 days (6 months) of seasoning, they will only be eligible for a ~$108,000 loan amount instead of a $150,000 loan amount. While this scenario is fairly uncommon, it presents a tradeoff for the investor who will either need to sacrifice time or cash out proceeds.

Cash out refinance is ideal for rental property investors who purchased the property with a hard money "fix and flip" loan, or for those who do not want to be limited by cost at 90 days or 180+ days of seasoning.

Summary: Delayed Financing

Delayed financing is a strategy that all rental property investors should become familiar with. Whether you're purchasing a turnkey property off market below market value and you want to be able to move quickly and recoup all of your invested cash, or you're using the BRRR method to purchase and rehab a property with cash and you want to quickly refinance to do your next deal, delayed financing is an attractive option consider for every deal as you build and optimize your rental property portfolio.