How To Refinance A Rental Property?

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Now number one, you may not be buying a property where you’re going to get a huge amount of equity after you do the rehab. You may just get a little bit, right? But that’s OK, because if you’re able to get money pulled back out from the bank, that’s money that you didn’t have before. What do I mean by that? I’m just going to say, for round numbers, let’s just say you bought a house for $20,000. You did a little bit of repairs, and it appraises at $30,000. Well, they’re probably going to give you about 85%, or 80%, or 75% of that 30, right, as a check to you. Great. It’s not a lot of money. It’s certainly money though, and it’s money you didn’t have before you did this refinancing process. So even though you didn’t add a ton of value, or that property is not worth $200,000, think of that as free money that you can then use to pick up your next rental property. But we’re going to be talking about numbers in the $40,000, $50,000 range. Those are the properties that I like to buy. All right.

  1. Step one in this process on how to refinance is simply to find a local bank. I recommend going to local banks, in your local towns, where you have your rental properties, and working with those local banks. They are going to give you the best refinancing options. Stay away from trying to go to these big, national banks, Bank of America, Wells Fargo, those types of places, because no one is going to know your local market like your local bankers will. So they’ll be able to assess the value of that property way better than a big national bank. So step one, make sure you work with, and find, a great bank in your local area that you can work with in order to refinance that property. All right.
  2. Step two in this process is to make sure that you’ve got the right loan that’s right for you. So the bank is going to say to you, OK, here’s what we can do for you, John. We are going to give you a loan on this property for 75% of the value of the property. So let’s say, for round numbers, you bought the house for $40,000. You added a little bit to it, and it’s worth about $50,000 and they’re going to give you a loan on that for 75% of that $50,000 and that number is $37,500. Now remember, you bought the house for about $40,000, but it’s worth $50,000 and the appraisal came in at about $50,000. They’re giving you $37,500 and the terms of that loan are going to be four percentage points, 4% interest. Now think about that for a second. You bought it for about $40,000. The bank is willing to give you, basically, almost what you put into the property in the form of cash, that you can then take and buy another rental property. Now you have that one available and done and you can do the same thing and rinse and repeat, using the cash flow from your tenants to pay back these loans and you want to stagger them so you’re snowballing that process. It’s powerful, right? Well imagine, if you just had a little bit more equity, and the house was worth $55,000. You’d pretty much, almost, be at a wash. The money you put in is the money you’re almost going to get right back from the bank. See how this works?
  3. Step three, we kind of jumped the gun a little bit, but wait for an appraisal. So the bank is going to do an appraisal on the property, and that’s where they’ll determine the value of that property. So like I said $50,000, that’s what the numbers we’re working off of in the terms of the loan. So if it’s worth $50,000, they’re going to give you an interest rate of about 4% and the value– 75% of the value of the property is the loan that they’re going to give you for $37,500. So you’re going to wait on this appraisal. Now appraisers can be a tricky beast. We’re in a weird situation right now with appraisal shortages across the country, and a lot of companies and banks are having to bring appraisers from other states into their state to do appraisers– appraisals. Which is crazy, right, because you think that the appraisal would come in from an appraiser who lives in the area, knows the area, knows the streets, knows the value.

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