Buying an investment property with a cash-out refinance
Becoming a landlord can be a savvy financial move for those prepared to take on the responsibility. With two or more properties building equity at the same time, you can expand your real-estate portfolio and build your wealth. If you think an investment property is right for you, a cash-out refinance can provide the means to your dreams. If you’re interested, consulting a Licensed Lending Officer at (888) 983-3270.
How a cash-out refinance works
A cash-out refinance is a replacement of your first mortgage. It will recalculate your home loan based on what you owe plus the cash you’d like to take out. If you have a second mortgage, the two can be rolled into one first mortgage with additional cash out, providing you have the equity to cover the amount.
When you complete the process, you walk away with a lump sum of cash, new mortgage terms, and maybe even a lower interest rate. If you don’t get a lower rate, it can still be a positive move; you’ll be investing in your future with the down payment for a second property.
Here’s what you need to think about to make this work for you:
The different rules on investment properties
Primary mortgage insurance doesn’t apply to investment properties, so you’ll need at least a 20 percent down payment before you buy. For example, if you want to buy a $200,000 home, this means having $40,000 in cash (which could come from your cash-out refinance).
Generally, more restrictions are involved with investment property loans compared with primary residence loans, so you’ll also need an excellent credit score and cash reserves. The assumption is that you’ll be collecting rental income to pay the mortgage instead of regular earnings from a job. And, depending on your tenants, this could be a risky scenario.
Lenders will want to make sure you’re not overextending yourself financially, which means mortgage interest rates are usually higher for investment properties.
Don’t forget that getting a cash-out refinance on your existing home in order to fund the purchase of an investment property covers only the down payment (unless you have a cushion built in).
Where to consider an investment property
Property in an area frequented by travelers could also help you generate a return to pay for the home loan. However, keep in mind that homes in vacation hotspots, like along the beach or in mountain towns, could come with higher price tags. The premium rates you can charge in season with weekly rentals, however, can really add up. Short-term rental services such as Airbnb can bridge any vacancy gaps while also letting you use the property when you want.
Check out college towns, too. These areas have a high demand for housing, and the need is consistent since a new class of students rolls in every semester.
For parents who have kids headed to college, an investment property in a college town may be a perfect opportunity. Parents can buy an apartment while their child is going to school, which provides housing for their offspring and generates rental income from roommates. Plus, Mom and Dad can continue to keep the property to rent to students, or sell it once their child has graduated.