Growing Your Rental Property Portfolio
Refinancing an investment property in order to turn the homes equity into cash can be a great way to grow a rental property portfolio. Many investors have discovered the benefits of using the equity in one property to help finance their next property. This is a common practice, and when done carefully, can significantly enhance your cash flows and income. At the same time, however, it is important to examine the expected return realistically before moving ahead with such a strategy. Unfortunately, it is too easy to forget to include the higher mortgage payment on the existing property into your calculations. Be sure to run the numbers and gather all relevant information before adopting this strategy.
How To Calculate The Equity You Have In Your Home
Your home equity is the difference between the appraised value of your home and how much you still owe on your mortgage. In laymans terms, it represents the amount of your home that you own. For example, if your home is appraised at $200,000 and you owe $120,000, you have $80,000 of equity in your home. The rest is the part of your home still owned by the bank.
Remember that lenders will still impose a maximum amount you can borrow, often 80 percent or 85 percent of your available equity so a new loan or a refinance makes the most sense if the value of your home has increased or youve paid down a significant portion of your mortgage.
Youll have more financing options if you have a high amount of home equity. Borrowers generally must have at least 20 percent equity in their homes to be eligible for a cash-out refinance or loan, meaning a maximum of 80 percent loan-to-value ratio of the homes current value.
Putting Investment Property Equity To Work
Cash-out refinancing for primary residence homes are gaining in popularity, but so are cash-out loans for investment properties.
While they were hard to come by just a few years ago, many lenders now offer investment property owners the chance to cash in on their non-owner-occupied homes equity.
If youre someone who generates income from rental properties, then a cash-out refinance could be a great strategy for you. Cash-out refinancing could help you grow your rental income, for instance, if the cash is for home improvements. Many cash-out refinance applicants lower their existing mortgage interest rate while taking cash out, improving their positive cash flow.
Heres what you need to know about the cash-out refinance rules as they apply to investment properties, and if youre a good candidate.
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Two Ways You Can Release Your Commercial Equity
1. Re-draw Facilities
If you are looking to expand your portfolio of Commercial properties, access to funds is every bit as important as interest rates and costs. You can request a facility with some form of re-draw available.
That will allow you to pay down a loan and then draw on it again up to your limit.
If your bank or lender does not offer that facility, you may need to re-finance to a more flexible provider.
A bank will generally require some form of evidence of the purpose before releasing funds. But the level of information required will differ from bank to bank.
2. Lines of Credit
Does your investment requires easy access to credit ? Then you can consider a funder that allows a line of credit facility secured by a Commercial property.
There are a small number in the market and using them mean paying a higher rate on your debt.
When considering the most appropriate loan product, you need to look at the use of funds and the potential for profit through using this equity. And compare it to the cost of leaving the equity idle.
Stash Away Emergency Cash
Financial experts typically recommend keeping three to six months worth of expenses in savings though you may want to save more if you own rental units. This can help you keep up with your mortgages, pay your bills, and otherwise maintain your lifestyle in case of financial emergencies.
Tapping your equity at a low rate, when you still qualify for the loan, could help you start this fund. Just be sure you can keep up with the higher payments from a cash-out refinance.
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Dont Spend Your Money On Other Things
Tapping into the home equity line like an ATM were patterns that ran rampant before the Great Recession of 2008. It did not help when adjustable-rate mortgages, skyrocketing mortgage loans, and line of credit HELOC issues hurt so many homeowners. JWB would never want you to suffer what affected so many homeowners at that time. Instead, we recommend that you take the equity built into the appreciation of your rental properties to purchase additional cash flow assets to speed up your ability to become financially free.
Higher Interest Rate Or Paying Points
Refinancing a rental property loan to take cash out for repairs could require a higher interest rate or paying points because of the higher risk of rental property loans, Huettner says.
To keep the interest rate the same as a loan on a primary residence, a borrower may need to pay 2-3 points on the loan, he says. Or they could pay one-fourth to half a point more on the loan’s interest rate, he says.
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Challenges Of Getting A Home Equity Loan On Rental Property
Like many types of loans that were easy to get years ago during the housing crisis, home equity loans and other loans to cash out on equity in rental properties were relatively easy to get. Now, not so much.
“There’s a higher risk with rental properties,” says Todd Huettner, president of It may not be offered
A home equity line of credit, or Higher ability to repay
To get a HELOC as a rental property owner, you may have to show that you can afford to repay the entire amount, says Lucas Hall, founder of Rental income information
In determining the ability to repay a HELOC or home equity loan, not all the rental income will be considered income, Ramnarain says, because renters may move out and landlords may have other problems.
For example, 75 percent of $1,000 in rental income would be counted as actual income, or $750, to account for other expenses as a rental property owner, he says.
Tax returns showing income generated from rentals may also be required, Hall says, as will copies of leases to show the rental home will be occupied for awhile and not just a few months.
How To Buy More Rentals With Cash
With interest rates at historic lows, lending readily available, and significant home price appreciation realized in Jacksonville over the last 3-5 years, this creates an incredible opportunity for rental property investors to acquire assets and accomplish their monthly passive income goals with no extra capital!
In this episode of the Not Your Average Investor Show, JWB Co-Founder, Gregg Cohen, reveals the strategy behind a cash-out refinances on an investment property. Cash-out refinancing is a tool that JWB clients often use to buy additional rental properties without bringing any additional cash to the closing. If you are unfamiliar with the concept of cash-out refinance an investment property, our goal is to share helpful information about using refinance rates to speed up the process of growing your real estate investment portfolio.
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Rental Equity Line Of Credit
All right, so RELOC may not be a term, but its still a thing. Landlords can take out lines of credit against their rental properties, rather than against their homes, if they have sufficient equity.
As with mortgages, expect the interest rates and fees to be higher on credit lines against an investment property compared to a HELOC. Thats because the risk to lenders is higher, as borrowers are more likely to default on investment property loans than on their home loans.
You can also expect the maximum LTV to be lower, with RELOCs compared to HELOCs. That means that lenders will lend you less of the propertys total value, again because their risk is higher.
Like HELOCs, rental property lines of credit make for flexible sources of financing for new investment properties if you have the equity.
You can also use LendingTree to compare quotes for rental property lines of credit.
Another option if you have equity in your home or other rental properties is cross-collateralization.
You can offer to let your lender put a lien against your home or another rental property, as additional collateral. Say you apply for a loan to buy a new rental property, and they require a 20% down payment . You dont have enough cash, but lets say you do have another property with $100,000 in equity in it.
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Applying For A Home Equity Line Of Credit
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Is Refinancing Investment Property Right For You
Ultimately, the choice of whether to refinance an investment loan is a personal one. Only you know your financial situation and your reasoning behind wanting to access more cash. If you have questions regarding your eligibility for this process, don’t hesitate to reach out to a loan officer in your area. Even if refinancing is not the best choice for you, they may be able to point out alternatives like a HELOC.
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Using Home Equity For Investment Or Rental Properties
Using your home equity to make a down payment or to fully purchase a rental property may be a good idea because it can help you secure low rates without having to go through the process of getting a second mortgage.
A home equity loan or HELOC can also be a good source of cash to make repairs or improvements on an investment property because the interest rates are usually much lower than other forms of borrowing, like credit cards and personal loans.
Most lenders will have a maximum combined loan-to-value ratio of around 85%. This means that your mortgage and home equity loan cant exceed 85% of your homes current value.
For example, if your home is currently worth $200,000 and you have a mortgage balance of $120,000, your current loan-to-value ratio would be 60%. The maximum amount of debt you could haveincluding your mortgage and home equity loanis $170,000 . This means the total amount of a home equity loan you could receive is $50,000 .
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Buy A Rental Property With A Blanket Loan
Ready to get more creative in accessing your homes equity?
Lets say you want to buy a rental property. You find a lender who generously offers 80% LTV financing or, in other words, requires a 20% down payment from you. You could cough up the cash, or you could offer to cross-collateralize your home.
It works like this: Instead of only securing a lien against the rental property, the lender puts a lien on your current home in addition to the rental. They get two properties as collateral, providing them with greater security. Because of the extra collateral, they no longer require a down payment at all.
Pros of a Blanket Loan
You dont have to come up with any cash for a blanket loan. You can potentially finance even the closing costs of the new property. But you do gain a new income-producing asset.
This tactic also doesnt require a separate settlement you merely close on the property youre buying with financing. The title company does have to pull two sets of title work, but any additional costs pale compared with the closing costs of a separate settlement.
Cons of a Blanket Loan
To begin with, youre putting your home on the line to buy an investment property, risking foreclosure and homelessness, as outlined above.
Similarly, if the property dips even slightly in value, it puts you upside-down on the mortgage.
The Bottom Line
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Investing In Real Estate
Whether youre looking for an investment property, want to start flipping houses or are interested in buying a second/vacation home, you can use the equity in your home to buy another property.
Still, real estate investing, and especially flipping, comes with risks. Investors need to have an in-depth understanding of the market theyre going into, how to price the property to move or rent quickly and how to handle other concerns. If youre renovating an investment property, build strong relationships with the contractors doing the work and be prepared to support the carrying costs of the property until its sold or rented out.
Benefits And Risks Of A Rental Property Heloc
Why are lenders so reluctant to approve a HELOC for an investment property? Say the borrower loses his tenants at the same time he finds himself unemployed a not altogether unrealistic scenario by any means. Life happens, and for a property investor that leaned on their home to grow their portfolio, things can get serious fast.
For a borrowers first priority in such a situation will be to protect his own home, not their investment properties. If the borrower struggles long enough and ends up losing their home in foreclosure, assets sold to pay off debts will not necessarily leave enough money to settle the second or third loan. That means the HELOC may very well never be repaid, leaving the lender empty handed.
As a result, lenders build in protections equal to the risks. For one, an investment property HELOC comes with a higher interest rate than one written for a primary residence.
A HELOC on a primary residence could have a loan to value ratio of 90%. Not so for a rental property, with stricter loan terms meaning the LTV may only reach from 75% to 80%. And one last big difference with an investment property HELOC is that the lender reserves the right to ask for two home appraisals, whereas one will suffice for a homeowner HELOC. Again, all these things are in place to protect the lender, due to the raised risks involved in granting a rental property HELOC.
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