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Tips for Multifamily Rental Property Cash-Out Refinancing

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cash out refinancing

One of my favorite financing tactics for rental property owners is cash-out refinancing.  I have done this many times in the past as part of my fixer upper strategy.  Specifically, I buy run down REO or foreclosure homes using money from my private lender.  My lender typically loans me the amount of money I need to buy the property, make the necessary repairs or renovations, and cover the carrying costs until the property is rentable.  Once the rehab project is complete, I’ll refinance into a traditional fixed rate mortgage to pay off the private lender, and get cash out to help fund the next project (assuming of course that the appraised property value is high enough to enable me to get out what I need while still retaining an acceptable level of equity).

Whether you refinance as part of a fixer upper strategy, or whether you simply want to refinance into a lower rate on a 30-year fixed mortgage, now is the time.  I’m not sure if mortgage rates have hit rock bottom, but it’s certainly close enough!  That said, underwriting standards have tightened in the last few years, so you’ll want to educate yourself on the guidelines from Fannie May and Freddie Mac so you have the proper expectations.

First, be aware that the equity requirements for a 2-4 unit multifamily rental property are higher now than just 5 years ago.  You now need to have 30% equity left in the property after you refinance.  For example, if the property appraises for $200,000, the most you would be able to finance is $140,000. And in some cases if you have a second mortgage, the equity requirement gets bumped up to 35%.  This is doubly important when you consider that appraisers have been under a lot of pressure to be conservative with their valuations ever since the housing bubble burst.  Therefore, this equity requirement could be a real financing barrier for many people.

Second, as I alluded to previously, thanks to the sub-prime debacle that triggered the housing slide, the credit requirements are now more stringent.  Generally speaking, you won’t be able to refinance at an acceptable rate unless your credit score is at least 680.  And many lenders want to see a score of 700 or more.  You can also expect more scrutiny over your income / expense numbers, and greater paperwork requirements.  So make sure your ducks are in a row before you start talking with lenders.

In summary, although cash out refinancing is more difficult than it was in the recent past, given the current ultra-low interest rates it is definitely worth investigating.  Just remember that you will need to show 30-35% equity still in the property after all is said and done, and you must make sure you have good credit and transparent documentation.  Good luck!

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