Cash out refinancing loans for your investment properties can help you during times when an investment opportunity is just around your horizon, but you are short of funds, or are not liquid enough to push through with the project. You can avoid an opportunity loss or a loss in potential income for you eventually; only if you have more cash at the right time.
What Is Cash-Out Refinancing?
In this Financing or Loan model, a new loan supplants your existing loan or loan on your property, and in return, you receive excess cash derived from the loan package. However, you will end up with a bigger loan. An article in Forbes.com states, “A cash-out refinance replaces your existing loan with a new, larger loan. You withdraw the difference between the old loan and the new, and you can use the money however you want.”
Why You Need Cash-Out Refinancing
Cash-Out Refinancing Loans against your investment property present a solution to various needs that may provide you with a better financial position after being addressed. Though there may be factors to consider in diving into the financing model, the potential benefits may outweigh the probable drawbacks.
Where Can You Utilize Your Cash-Out?
Real Estate Investment Portfolio
The net proceeds from a Cash-Out Refinancing Loan can finance additional Real Estate Investment Properties, or as down payment or equity for another investment property, such as, but not limited to, a multi-family property, a rental property, or a commercial property, thus, building up your rental portfolio. The collective income derived from the total portfolio will help in loan payments.
Pay-Off Existing Loans with Higher Interest Rates
Personal Loans carry higher interest rates because they are unsecured loans. A Cash-Out Refinancing Loan on your investment rental property provides the opportunity for you to pay off such loans, with monthly amortizations lower than the amortization you are currently paying right now. You can also use the cash out to pay off your credit card debts. Loan consolidation, therefore, provides the opportunity to consolidate your loans and take advantage of lower monthly amortization.
Rental Improvement or Rehabilitation Projects
Improvements or rehabilitations on your existing rental properties can improve tenant-owner relationships and increase the value of the properties. As a bonus, if the property improvements or the rehabs has significantly increased the worth of your properties, your loan interest rates can be tax deductibles. Even if your rental property is still loand, you can avail of a Cash-Out Refinancing Loan on that property.
Use the Cash-Out for Another Business
If you are thinking of a new line of business, your current rental property can be offered as collateral in a Cash-Out Refinancing Loan with a hard money lender. Provided, however, that lender conditions are properly met. You may end up having extra cash to use as capital in another venture.
Additional funds allow you to invest in more properties or other activities that increase portfolios further.
How does a Cash-Out Refinancing Loan Work?
With a Cash-Out Refinancing Loan on your existing rental property, the mortgagor aims to secure excess cash from a loan transaction that supplants or replaces the existing loan on a real estate property.
In the computations below, you can see an example of a cash-out refinancing loan transaction.
Appraised Value of Property: $400,000.00
Maximum LTV Ratio of 75%: $300,000.00
Remaining Loan Balance: $100,000.00
Gross Cash-Out: $200,000.00
The Gross Cash-Out of $200,000.00 from the Refinancing Loan is the difference between the Loanable Amount of $300,00.000 and the Remaining Loan Balance of $100.000.00. In this scenario, the Gross Cash-Out is relatively substantial to finance whatever projects you may have in mind. However, note that you will have to pay for another appraisal of your property and closing costs. Such expenses will eat up on the Cash-Out.
Most hard money lenders require that the equity on an existing rental property loan to be qualified for Cash-Out Refinancing is a minimum of 20% of the loan amount. This way, you may be able to take home some cash-out. Cash-Out Refinancing loans work best when the remaining balance on your existing loan is substantially lower. A good rule of thumb is when your loan is already halfway through its term. The lower your remaining balance, the more you will get Cash-Out from this loan model.
What do you need to do and prepare?
As a borrower, it would be best for you to be ready with your investment plans. You should already have an estimate of your project costs, inclusive of all unforeseen expenses. A ballpark figure gives you an advantage in projecting the costs of the project and managing your funds. An important factor when you are already working on the possible amount the Cash-Out Refinancing Loan can afford you. Because there is always a minimum of two possibilities: The Cash-Out may not be enough, or it may also be more than enough to cover your project costs. Working with the Hard Money Lender on this equation is highly recommended so you can have a mathematical scenario or model to base your decision on, and you may come up with a nearly realistic estimate on all fronts. You do not want to pay for more than what you need.
Since Hard Money Lenders focus on the property’s value, there may be minimal requirements you would need to prepare the usual proof of income, your loan repayment history, and other required documents for submission for a decision to be made. Hard Money Lenders can also process the Refinancing within a reasonable time of two weeks, which can be more than enough to pursue a property investment in the market. It is not wise to fund a vacation with it, much less purchasing luxury goods with the funds, or you will end up paying for them in a very long time.
Cash-Out Refinancing Thoughts to Share
Maximize the potential of your existing Rental Property Loan. Cash-Out Refinancing Loans can be virtual mines of cash that you can have, provided you and your existing loan are qualified. However, being approvable does not mean that you can avail of a loan without considering what to do with the money. It is wise to have a plan, whether you want to add to your real estate rental portfolio, engage in house flipping, or even rehabilitate or renovate your existing investments. You do not want the burden of excess cash that incurs interests, or consequently, running a project with a shortage of funds.
You can always call on us, and we will be glad to help you prepare your path towards better income and better loan management. Call GL&L Holdings now at (832) 770-9415 or shoot us an email at info@gllholdings.com, and you can also send us a message through our website.
