Wednesday, 02 October 2019 12:39

What to Know About a Cash-Out Refinance Rental Property

How to Do a Cash-Out Refinance on Your Rental Property

What to Know About a Cash Out Refinance Rental PropertyBanks are not easy to work with when it comes to financing rental properties. To do a cash-out refinance on a rental property, you’ll need to work with a direct money lender. These lenders are not subject to the same stingy standards as banks.

Why do Investors Choose to Cash-Out Refinance?

Seasoned investors take advantage of refinancing their rental properties for a number of reasons. They may be able to qualify for a better loan than their original loan, a change in interest rates, the value of the property may increase, or may need to make some improvements.

 

In addition to saving money with lower payments, a cash-out refinance will give you some extra cash to make new investments. A cash-out refinance generates a larger loan than what you would have had with your previous balance. The extra money in that loan can be used to finance the acquisition of additional rental properties.

Here’s where it gets interesting. In benefitting from the lower payments and more capital to invest, you’re in a prime position to buy another rental property. With the money free to put down on more property, you can get your bearings while still enjoying the lower payment from the refinance. Usually, that buys enough time to start turning a profit on the new property.

How Much Can an Investor Take Out?

Investors need to know how much money they can take out. The amount of equity you have in a property is crucial. The stipulation is 75% or lower loan to value ratio to meet most banks guidelines. Banks will typically use an appraisal to generate the value of the property. On occasion, you can find lenders that will go as high as 80%. If the rental property is a 2-to-4 unit parcel, the percentage is 70. If adjustable mortgage rates apply, the maximum is reduced by 10%. Some investors are privy to an owner-occupied loan and can refinance up to 95% or more. With this type of loan, the home must be occupied for a year after refinancing.

The top LTV is 70% if the property was listed for sale in the last six months. If you have purchased the property within the last six months, you cannot qualify for a cash-out loan unless it meets the exception for the Delayed Financing guidelines.

Qualifying for Cash Out Refinance on Rental Property Thru a Direct Money Lender

By applying thru a direct money lender, you can skirt a lot of the pesky requirements typical of banks. With a direct money lender, as long as you have a credit score of at least 600, you can qualify. Another key advantage is that the property doesn’t have to satisfy bank metrics like Debt-To-Income (DTI).

You can qualify for cash-out financing as an LLC, individual, family trust, corporation, or LLP. Out of these forms, it is highly recommended to finance rental properties as an LLC. As an LLC, you can safeguard your personal assets and will not be held liable if sued by tenants or neighboring property owners.

Advantages of a Cash-Out Refinance on Rental Property

With a cash-out refinance on a rental property, you can save money by consolidating and expanding at the same time. By taking that extra cash that’s liberated by cash-out refinancing, you can expand your real-estate empire with comfortable payments.

Taking out more capital from the refinance is less expensive in the long run than applying for a separate loan altogether.

Are There Any Risks Involved?

To put it into perspective, maximizing returns requires some risk. It all depends on your goal. If you are more interested in paying off the loan on that property, you may opt-out of a cash-out refinance. Do not forget to consider fluctuation in property values. If your home value happens to decrease, reducing the equity in that parcel, you would need to put the cash-out refinancing on the back burner for a duration. If you are incurring a slower rental turnover, and difficulty making payments, it is a better decision to refrain from refinancing if it means an increase in your payment.

Can a Refinance Affect Qualifying for Future Loans?

If you are pursuing acquisitions for multiple properties, keep in mind the possible effect refinancing may have on qualifying for those properties in the future. Find out how much is safe to refinance, so it does not compromise future loans for more properties. If you max out your debt, lenders will not be able to loan you the money to acquire another rental property.

Costs Involved With a Cash-Out Refinance

Investors need to recognize the potential costs involved with refinancing. You are acquiring another loan, so you will be incurring similar costs as you did when originally taking out the loan. Plan on processing fees, origination fee, appraisal and more.

Cash-Out Refinance Rental Property with Rental Home Financing

A cash-out refinance won’t just save you money on your monthly payment. It will free up fresh capital for you to invest in another rental property. By going through Rental Home Financing for your cash-out refinance for rental property, you’ll be saving money while collecting additional income from your subsequent investment. Savvy investors always refinance when presented with an opportunity to save.

Call up Rental Home Financing today and see what a cash-out refinance can do for your pocketbook!

 

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