One of the biggest roadblocks to the rookie or even seasoned investor is finding the cash for down payments on new properties. When I purchased my first long term rental I was able to buy the property because of proceeds from refinancing my personal residence. I was lucky and was able to cash out almost $40,000 in equity when I refinanced even with an 80% loan to value ratio. I was able to do that because I bought my personal residence as a foreclosure and got a great deal.
I was able to turn that money in a 24% 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.
Values are going up across the country and that has created an opportunity for investors to tap into equity again. Many people will tell you the right thing to do is to pay off your home as quickly as possible, however I do not share that philosophy. In my market I can get an ROI of 20% or higher on rental properties while refinancing at rates below 4%. It makes more sense to me to refinance for 4% and use that money to buy properties that will give me over 20% return! That 20% return does not even include possible appreciation, tax benefits or mortgage pay down.
Not only can you refinance you personal residence you can also refinance your investments to get extra cash. I refinanced one of my rentals in December of 2012 to bring in some extra cash for more rental purchases. In order to take out cash in refinance the terms are usually a little different and it can be difficult for those of us with more than four mortgaged properties. I was able to do it by using a portfolio lender, who should be a key to any Real Estate investors strategy.
When I refinanced my investment property I could only do a 75% loan to value ratio if I wanted to take cash out, I also could only do a 5 or 7 year ARM or 15 year fixed loan. I chose the 7 year ARM because I plan to pay off my homes quicker than 7 year and the rates are lower. I first bought this property in October of 2010 for $92,000 and put about $18,000 into it in repairs. I was able to turn it into a 5 bed, 2 bath and rented it for $1,100(low because it is rented to my brother-in-law). I had to wait a year to refinance and the current value was depending solely on an appraisal. The appraisal came in at $140,000 which I thought was low, but oh well. After all the lender fees, interest and miscellaneous costs of a mortgage I was able to cash out over $26k. 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.
The more properties you can buy, the more cash flow and the faster properties can be paid off. The more properties you buy, the more you can refinance and then you will have more money to invest. Once you get a few properties in your portfolio you can really accelerate the buying process by cash out refinancing.