Is Cash-Out Refi The Best Option for Your Investment?
Mortgage rates are at an all-time low, which is creating a lot of money-making potential for real estate investors.
With interest rates so low, it’s a prime opportunity for investors to explore refinancing options. Opting for cash-out refinancing can be a great way to convert your equity into money you can use to expand your portfolio, raise rents, and raise property values.
What is a cash-out refinance loan?
Investors who want to upgrade other properties, purchase additional properties, or pay down some debt, often turn to the equity they’ve built up in their property to get a hold of the cash they need.
Enter the cash-out refi loan.
As you own rental property and continue to make payments, you build up equity in that property. Let’s say that you’ve owned and made payments on your rental property for several years. You now owe $100,000 on your mortgage, but the house is worth $250,000. You’ve built up $150,000 in home equity.
You’ve got a kitchen that needs to be remodeled, and it’s going to cost you $20,000. You can refinance your mortgage at, say, 80% LTV (loan to value). With this money, you pay off your $100,000 existing mortgage, and still have $100,000 to work with. This allows you to upgrade the kitchen—an investment with strong ROI because it will let you increase the rent you make from the property. You can then deploy the additional cash on hand as down payments on future SFR (single-family rental) property purchases. You’ve turned the equity in the rental into cash you can deploy to increase your overall investment profitability.
Investors often talk about this as using leverage to scale their portfolios. Leverage is one of the most powerful tools investors have. It allows them to buy bigger properties, scale up their rental property portfolio and diversify their portfolio.
Leverage allows investors to do all of this by minimizing the amount of personal capital needed. With rental property interest rates at all-time lows, this is a great time for aggressive investors to use cash-out refinance as a tool to grow their investment portfolios and their monthly income.
Pros and cons of a cash-out refinance loan
Cash-out refis are a great option for investors who have higher credit scores and a track record of success. Like anything else, moving forward with a cash-out refi has its own pros as well as factors to consider.
Pros of a cash-out refi:
- A favorable interest rate:
- One of the advantages of a cash-out refinance loan is the interest rate. A mortgage backed by an investment property as collateral will usually give you a better rate than trying to borrow the same amount from a bank.
- An increased ROI:
- With a wise use of leverage, investors can increase the ROI or cash-on-cash return.
- Diversifying your portfolio:
- With your cash in hand from the cash-out refi, you can add to your SFR portfolio by investing in additional rental properties.
- Big ticket items:
- Maybe you have a kitchen, a bedroom, or a backyard at one of your rental properties in need of some TLC. You have the option to make ROI-boosting capital expenditures with a cash-out refi.
- Lima One allows you to leverage multiple properties in a cash-out refi. So instead of pulling a small amount of equity out of one property, you can wrap multiple properties into one loan and get cash out based on the equity of all properties. This allows you to grow more quickly, while simplifying your monthly payment and loan servicing of escrow, taxes, insurance, and more in one place.
Factors to consider with a cash-out refi:
- Negative cash flow:
- When you pull your equity and add another mortgage, you must take care to avoid negative cash flow that can happen if you over-leverage or cut margins too thin. Lenders like Lima One have DSCR requirements to ensure your properties continue to cash flow.
- Loan length:
- A cash-out refinance could, depending on the terms of the loan, reset your loan. You’ve got a mortgage, and you’ve only got 10 years left. By doing a cash-out refi, you’ll reset the life of the loan, often to a 30-year fully amortizing mortgage like you can get from Lima One.
- Typically, lenders will require seasoning on a property before allowing a cash-out refi. This period of time (currently around six months) ensures that the value changes on a property are real and sustainable. This also protects you from accruing too many fees in a short period of time.
- Fees, Fees, Fees:
- Origination and application fees, appraisal and inspection, and closing costs are important to consider. Make sure you calculate the ROI on these fees just like you would on a capital expenditure. When you do, you’ll know that the leverage you’re gaining and the properties you can now acquire are worth the cost of a new loan.
Guidelines for a cash-out refinance loan
Like every other loan process, investors must meet certain requirements to qualify for a cash-out refi loan. At Lima One, we focus on making this process as simple as possible. Investors provide a photo ID, entity documents, bank statements, and a few other documents to complete borrower underwriting through our line of credit process. Once that’s done, it’s simple to complete a rental property or portfolio application.
Conclusion: When is a cash-out refi right for you?
So, why is a cash-out refi a good option for investors? Typically, there are three main reasons investors opt for a cash-out refi: to finance improvements in their rental properties, to expand their real estate portfolio, or to tackle other big expenses.
Regardless of why you choose the cash-out refi loan, Lima One is here to help. Many investors scale their portfolios using cash-out refi rental portfolio loans from Lima One No matter where you are in your investment journey, Lima One can help.