Building wealth through real estate is a relatively slow process, and finding the capital to grow as an investor requires careful planning. The cash-out refinance method allows you to put your property’s equity to work and gain the capital necessary to diversify your portfolio and build wealth faster. If you want to understand what cash-out refinance is and why it’s great for rental property investments, let’s break it down into simple terms.
What Is Cash-Out Refinancing?
Cash-out refinancing is a popular strategy, typically used by homeowners, that allows you to put your property’s equity to work. By taking out a larger mortgage on a property than you currently owe, you receive the difference in the form of cash. For example, say you owe $250,000 on a mortgage for your property and do a cash-out refinance for $300,000. Depending on closing costs, and the equity percentage your lender requires you to keep, you should receive around $50,000 in cash. Homeowners often use this strategy to make home repairs and take care of personal expenses.
How Does This Work in Terms of Rental Properties?
Cash-out refinancing works in the same way for primary residencies as it does for rental properties, but there are a few critical differences. For rental properties, the amount of equity you have to accrue before you can refinance is typically around 25 percent. The amount of cash out—loan-to-value ratio—will also vary from lender to lender. You can also expect your interest rate to be slightly higher as there is inherently more risk in investment properties. However, the money you get through this strategy isn’t taxable, and depending on how you use the money, you can deduct the expenses from your taxes.
Ultimately, you can use this money any way you want, whether to pay off loans or achieve other financial goals. However, you can also use this money to put down payments on other investment properties to diversify your portfolio and pay off the higher mortgage. You could also use this money to make improvements and repairs on your rental property, which would be a tax-deductible business expense. This would also yield more returns so you could pay off that new mortgage and put more in your pocket.
Should You Use This Strategy on Your Property?
We know what cash-out refinance is and how it works for rental properties, but should you apply this strategy to your investment property? The truth is that it all depends on your financial goals. Remember, closing costs and interest rates are typically much higher for investment properties. Some lenders also require you to own the property for a certain period. If you find that the cash you’d receive doesn’t meet your financial goals, you may want to wait until the value appreciates more or until you find a better deal.
If you’re having trouble getting the most out of your investment property, let Excalibur Homes help. We’re an Atlanta property management group that will help you market your property, find quality tenants, and manage your rental so you can get more cash for less work.
