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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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.