How to Refinance Your Personal Residence to Get Money for Rental Properties
One of the biggest roadblocks to buying rental properties is finding the cash needed to pay for 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. I was lucky and was able to cash out almost $40,000 in equity when I refinanced my house even with an 80 percent loan to value ratio. I was able to refinance and take cash out, because I bought my personal residence as a foreclosure well below market value.
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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.
How much money do you need to buy a renal property?
For most investment properties you will have to put at least 20 percent down. There are also other costs like closing costs and some times a houses needs repairs before it can be rented. In my experience it takes about $30,000 in cash to buy a rental property that costs about $100,000. I like to buy properties that need repairs, because I can get a better deal on them. Finding $30,000 to invest in a property is not easy for most people, but there are ways to get into rentals properties without having to save all that money. There are options like private money, hard money, seller financing and a cash out refinance.
How do you know if you can refinance your house?
Refinancing your personal house is much easier than refinancing an investment property. With a personal residence you may be able to refinance up to 95 percent of the value of your home or more and government programs like HAMP may allow you to refinance even more. With investment properties, it is very difficult to refinance more than 75 percent 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 so 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 percent 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 percent of the loan amount and 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.
Why you have to get an appraisal when refinancing
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 percent, 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 and 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 percent 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 percent 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.