Investment Property: Is Cash-Out Refinancing a Good Idea?

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In the yesteryears before 2008, cash-out refi had a different set of rules. A real estate investor could take a loan of up to 90% of the after-repair value of a renovated house, pay back the private money lender, and then use the rest as income or to put towards the next real estate deal. These days, the climate has changed and no sane bank will allow a 90% refinance loan. The highest you can find is probably a 70% to 75% cash-out loan, and there are restrictions on how many of these loans you can get. So, is refinancing the same as it used to be? Can it still help an investor to get a good cash flow on multiple properties?

The key is to make sure that the refinance is for a long-term rental property. The best way to refinance is to take a fixed rate loan and opt out of the option arms or fancy ad-ons. You want to know exactly how much your overhead will be per month, so you can calculate the cash flow and adjust your rents accordingly. Keep in mind that if you take out a loan with less than 20% equity, you will have to pay mortgage insurance, adding to your total monthly expenses. The goal of refinancing is to get a greater cash flow per month since the monthly payments will be less than they were for the mortgage or private lender loan. If you have four or five long-term rental properties, then refinancing may work for all of your properties. Additional properties can be refinanced using private lenders acting in the place of a bank.

Refinancing is not appropriate for short-term goals, i.e. anything other than a rental property. Refinancing will have you paying a lower monthly premium, but for a longer period of time. You don’t want to get stuck with a 30-year monthly premium for that $20,000 you wanted last year, even if it may be tempting at the time. Additionally, beware of the overleveraging trap for the inexperienced investor. If you’re refinancing too many properties or you are at too high of a loan to value ratio, you may not be able to raise the rents enough to cover the payment. This could easily result in no cash flow or negative cash flow, which obviously is not sustainable. Be conservative in refinancing and only take a cash-out loan if you can guarantee that you will have a positive cash flow from the rent.

Even though banks prefer conservative lending practices, you can still make cash-out refinancing work to your advantage in this environment. If you structure the refinanced loan to fit with a long term goal and calculate a positive cash flow, refinancing may be a good idea

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IndianaInvestmentPropertyGroup.com

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Based out of Indiana, Cliff Redding is a real estate entrepreneur, real estate broker, and property manager with experience in single family and multi-family management.

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    7 thoughts on “Investment Property: Is Cash-Out Refinancing a Good Idea?

    1. Hi Rico:

      That depends on the rules of the lender. In this current environment, most banks will probably want at least 6 months if not a year of seasoning before they will do a cash out refinance.

    2. Jay, I own my own business, which normally brings in good income, but 2013 I started business #2, which zapped away most of my profits from business #1, so debt to income ratio looks horrible. Banks aren’t allowed to consider 2012 tax returns if 2013 is less. I have enough cash to buy some properties without any financing right now, but ultimately I want to leverage my money and create better ROI, preferably at 75% LTV.
      Would it be a good idea to pay all cash for these properties now, then when 2014 tax returns show a healthier income (it will), do a cash-out refinance? Will I still be able to get 75% LTV if I do it this way? Would I incur extra expenses or higher interest rates doing it this way vs. waiting until April next year to buy (assuming fed rates stay the same)?

    3. You present a good question. I am going to make a couple assumptions, so if the assumptions are incorrect, you will need to adjust. I am going to assume that you are purchasing cash flow (rental) properties since you are talking about doing a cash-out refinance. I am also going to assume that you are experienced or have a qualified property management company in place to manage and operate the properties. Making these assumptions, I doubt that you are going to be able to get a cash-out refinance for up to 75% LTV in this current lending environment for long term financing. You will need to contact some local lenders at community banks or credit unions and see what LTV they are willing to lend up to. Most of the banks in our area are only willing to go up to 65% LTV if they even want rental properties in their portfolio. If you have the cash now and the deals are great deals, and if I was in your position, I would see no reason to wait. Go ahead and get a years worth of cash flow off of the property. Make sure that you keep enough money in reserves to handle any emergencies on the property as well as adequate personal reserves. The key is to make sure they are great deals. Part of investing is being patient to find the great deals that fit your buying criteria. I also encourage you to request to be a part of our Facebook group at Indiana Investment Real Estate Investors. There are a couple lenders in the group that do cater to real estate investors specifically and can lend nationwide. I hope this is helpful. Thank you for your question.

    4. Jay, I couldn’t find your FB page. Can you provide a link? I didn’t realize you were in Indiana. I actually have a rental property in Bloomington. I’m currently looking to buy in Syracuse and Lubbock, while my wife has her eyes on Palm Bay, FL.

      Your assumptions are correct. The deals are good, but I have a feeling there will be good deals in 6 months too. I really want to maximize my money and leverage as much as possible. I understand the complexities of cash out refinance when there are multiple mortgages involved, but if a house is entirely paid off, why are banks more reluctant to cash out refinance compared to doing a new loan?

    5. We just moved into a bank owned home ie: money pit. The home we moved out of has not sold & we are losing our reserves by continuing to make the mortgage payment on 2 homes. Quite a few people are interested in renting our other home, but we were hoping to sell in order to have more money for the money pit. At this point we are seriously considering renting it out, as we have had a rental before and are experienced in the process & no one wants to buy the home even though people that have considered buying it say it is reasonably priced, but too much home for them or not what they want, etc. What we were curious about is if it is possible to refinance the property. Would it be best to have it rented prior to refinancing or should we try the process prior to renting it out? We are hoping to combine the 1st & 2nd mortgages on this home, thus having one payment & possible lowering the mortgage payment itself. We have had this home for over 10 years, so we really don’t want to go back to a 30 year note. Any advice on what can be done or are we stuck with renting it out how everything currently exists?
      Thank you so much!

    6. Thank you for explaining your situation and sharing. Here are a few thoughts for you to consider. Just because a loan is a 30 yr loan, does not mean that you have to pay it for 30 yrs. What is more important is that there is no pre-payment penalty in the mortgage. You can always accelerate your principal pay down. The first few years of a standard 30 yr note, you actually pay very little principle. This is where the banks make most of their money. Just doubling the principle part of your payment for the first few years of your loan will take years off of the total length of the mortgage. You can take a 30 yr loan down to a 15 yr loan very easily just by doubling your principle over the first few years of your loan. Double that principle payment could be as little as an extra 50-70 dollars per month depending on the size of the loan. You have to work the numbers, but I would not shy away from a 30 yr loan, just accelerate it at the pace you want. Get a print out of the amortization schedule of the loan and just pay two months principle payment at a time and see how fast that moves your down the amortization chart. Next, depending on the amount of equity that you have in your home, you may be able to refinance it and roll everything into one loan. Since I don’t know the exact numbers we are talking about, I am talking conceptually here. One issue you may have is the fact that you are not now living in the home, the bank will probably now view it as an investment home and will not lend as high of Loan to value. Many banks will not lend any greater than 70% of valuation on an investment property. Some will not go higher than 60%. You will have better luck and more flexibility in talking with a community (local bank) or credit union than a big name national bank. I do not believe that all is lost here, but you will need to devote some time talking with both residential and commercial loan officers at your local community banks. Please realize, that some banks just do not have an appetite for investment real estate and others do. So you are going to go shopping and see who is willing to work with you. You might also be able to go on the commercial side and do a cross collateralization with both homes securing the loan and have just one payment. Most commercial loans are fixed for 5 yr terms and then renew at a new interest rate based upon the Libor or T bill. Most banks will want to see the property rented and many will want you to keep 6 months rental income in reserves for any emergency. Hopefully this has given you a few more ideas to consider.

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