"Guide to Refinance Rental Property"

You'll want to be familiar with how to refinance rental property because it is something that just about all long-term multifamily property investors must do at some point. The process is similar to getting the initial mortgage, with the main difference being that you'll already own the property.

CASH OUT REFINANCE VS. STANDARD REFINANCE

You can typically refinance investment property by doing a standard refinance or a cash-out refinance. A standard refinance is where your old mortgage is paid off with the new mortgage. You then make your monthly payments to the new mortgage company. You're simply replacing one mortgage with another.

With the latter, you can "cash out" some built-up equity as long as you retain a 20% equity cushion (i.e., on a $100K property the total mortgage balance – consisting of the loan plus the cash you got back – should not exceed $80K).

For example, if the property is worth $100K and your mortgage is $70K, you should be able to pull out $10K in cash to pay off your down payment, rehab expenses, etc. The appraisal is critical here, because the higher the appraised value, the more equity you will have to potentially cash out.

WHEN TO REFINANCE RENTAL PROPERTY

Generally speaking, you'll want to refinance investment property under the following circumstances:

• You purchased & rehabbed a fixer-upper using a private lender, and now you're ready to parlay your sweat equity into a 30-year fixed mortgage. Review this tactic here.
• You would like to use the property's built-up equity to pay off your down payment financing source (say, after owning it for 5 years).
• You have a shorter-term loan that is due to mature and be paid off (i.e., balloon payment).
• You have an adjustable rate mortgage (shame on you!) that you're trying to get out from under.
• Rates declined and you would like to lower the interest rate on your fixed loan (note: make sure you crunch the numbers to see if the reduced monthly payment justifies paying the closing costs).

There may be other situations where you'll want to refinance, but those are the "Big 5."

HOW TO REFINANCE RENTAL PROPERTY

• Do the math to ensure the time is right. You will have closing costs just like any other mortgage.
• Price shop, starting with your current mortgage provider if you already have a bank loan.
• Decide on an issuer and lock in the rate.
• Coordinate, and prepare for, the appraisal.
• Coordinate the title work (yes, required even on an investment property you already own).
• Schedule the closing and review the HUD-1
• Execute the closing

To sum up, your ability to refinance rental property is driven by the apprised value. Your goal absolutely, positively must be to maximize the appraised value, so make sure the property is presented in the best possible light. The bottom line is that if you get a "bad" appraisal, your investment property refinance ability will be severely limited.

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