One of the biggest roadblocks to the rookie or even seasoned real estate investor is finding the cash for down payments on new properties. When I purchased my first long-term rental I was able to buy the property from proceeds I obtained by refinancing my personal residence with no money down. I was lucky and was able to cash out almost $40,000 in equity when I refinanced even with an 80% loan to value ratio. I was able to do that because I bought my personal residence as a foreclosure well below market value. On most refinanced loans a home owner is able to refinance with no money down.
I was able to turn that money into over a 20% cash on cash return on my first rental property. In my complete guide to investing in long-term rentals I detail how I get these returns, how I find properties, how I finance them and list the numbers.
Can you refinance your mortgage?
If you are trying to refinance your personal home, you will have a much easier time than trying to refinance an investment property. With a personal residence you may be able to refinance up to 95% of the value of your home or more with government programs like HAMP. With investment properties, it is very difficult to refinance more tan 75% of the current value of your home. The good news is values are going up across the country and that has created an opportunity for people to refinance and possibly take cash out.
What is a cash out refinance?
A cash out refinance is when you refinance your mortgage at an amount that covers your current mortgage, all closings costs and leaves you with money left over. That extra money ends up being cash that you can use for anything! I feel you should not use money you receive from a refinance for anything but investing or emergency situations. When you receive cash from a refinance it is not taxable like income is. You are borrowing that money from the bank and it is tax-free. A cash out refinance is most common on personal residences, but investors can use them as well.
Can investors do a cash out refinance?
Investors can do a cash out refinance, but it is much more difficult to refinance investment properties. Investors usually cannot refinance for more than 75% loan to value ratio. When an investor has more than four mortgages, many banks will stop allowing a cash out refinance all together although they may allow a non-cash out refinance. I refinanced one of my rentals in December of 2012 to bring in some extra cash for more rental property purchases. I was able to do a cash out refinance by using a portfolio lender, who will allow a refinance for investors with more than four mortgages.
Why can you refinance mortgages with no money down?
It is actually not difficult to refinance with no money down, even if you are not doing a cash out refinance. The key is having enough equity in your home to cover the closing costs on the new loan. When you buy a new house and get a loan, the lender has many costs that you are charged to get a new loan. You have to pay origination fees, interest, insurance, recording fees, appraisal fees and more. Those costs usually end up being about 3% of the loan amount. If you are refinancing those costs are about the same as is if you were buying a brand new house. Not only must you factor in how much your previous mortgage was when calculating if you can refinance with no money down, you have to factor in these closing costs as well.
The appraisal is the most important factor when refinancing a mortgage. The appraisal is what most banks will use to determine the value of your home and what value the new loan will be based on. If your home is appraised at $100,000 and the maximum loan to value ratio your bank will allow is 75%, then your loan cannot be more than $75,000 ($100,000 x .75).
When you are buying a home an appraiser has a value to base his appraisal on; the purchase price. But when you are refinancing the appraiser does not have a value to base the appraisal from. This can lead to a wide range of appraisal values in my experience low appraisals. I have had two appraisals in the last two years come in very low on rental properties I was refinancing. If your appraisal comes in low, there is not a lot you can do to change it. You can try having your lender challenge the appraisal, but many times the appraiser won’t change his value. If you choose not to refinance after a low appraisal, your lender will most likely charge you for the appraisal, which can run $300 to $600.
What are the terms on an investor cash out refinance?
When I refinanced my investment property I could only refinance with a 75% loan to value ratio. I also could only do a 5 or 7 year ARM or a 15 year fixed loan, because I used a portfolio lender and those are the only loans they offer. I chose the 7 year ARM because I wanted a little more time to pay off the loan than the 5 year ARM and I wanted to maximize my cash flow with the lower payments of an ARM. I first bought this property in October of 2010 for $92,000 and put about $18,000 into the home in repairs. I had to wait a year to refinance (which most lenders will require to get cash out) and the current value was determined by an appraisal. The appraisal came in at $140,000 which I thought was low. After all the lender fees, interest and miscellaneous costs of a mortgage I was able to cash out over $26,000. My payment went up$136 a month, but I am still able to cash flow and I have more than enough money for a down payment on another rental property.
My interest rate was about 4% on this refinance and rates and fees on a refinance loan should be very similar to terms for a new loan on a new purchase. My interest rate and fees are a little higher on these loans that typical loans, because I use a portfolio lender , not because I am refinancing.
It is difficult to come up with enough money to buy multiple rental properties, because of the cash it takes to buy investment property. A cash out refinance is a great way to get extra cash to buy more proprieties. You should be able to refinance mortgages with no money down as long as your property can appraise for enough money. If you can find a great portfolio lender you should be able to continue to refinance properties and take cash out even on investment property.
For more information on financing rental properties please check out my new Ebook: How to Get Financing on Multiple Investment Properties.