Homeowners

Hope to Become a Real Estate Investor? How Homeowners Can Use a Cash-Out Refinance to Do It

Many homeowners look at the equity they build in their properties like money in the bank. You can tap into it if you have an emergency, want to fund a home renovation, or hope to finance other investments, including the purchase of rental properties.

Rental properties often provide landlords with passive income while helping them to build even more income. And while being a landlord can require work, investment properties can also provide tax advantages.

Cash-out refinances can help homeowners fund the purchase of investment properties. With this strategy, you trade your existing mortgage for a new one that’s for a higher dollar amount. You can then use the extra cash to buy real estate.

“Most lenders require a 20% down payment on investment properties and [one of] the easiest way to get it is to look at the equity in your home,” said Miguel Mouriz, vice president of Central Florida at New American Funding.

Of course, it isn’t free money. You’ll have to pay off a new mortgage that has a different mortgage rate, based on the current market. And taking out extra cash often means it will take you longer to pay off your new mortgage.

But if you buy the right rental property, Mouriz pointed out, you can use the surplus money tenants pay you to make additional payments on your loan.

Using a home equity loan to purchase a rental property

Homeowners with low mortgage rates may be reluctant to trade those in for higher rates with a cash-out refinance. They may want to consider taking out a Home Equity Line of Credit (HELOC) to help come up with the down payment.

This type of loan operates like a credit card. Homeowners only take out as much as they need and generally have between 10 and 20 years to repay the loan.

“With a HELOC, you don’t cancel your first mortgage,” Mouriz said. “You just need to check out the terms of repayment to make sure there are no minimum payments or fees.”

It’s important for real estate investors to be ready to make an offer

Having cash ready to go is important if you find a good deal on the right property.  

“With these deals, you have to strike when the iron’s hot,” said Charles Tassell. He is the CEO of the National Real Estate Investors Association, a 40,000-member trade group that represents investors across the nation.  

Mouriz noted that the loan for the investment property can be processed simultaneously with the cash-out refinance or HELOC.

“You will save time, and you can use the same assets and income documentation,” he said.

Wasting time is the last thing you want to do because real-estate investments don’t bring wealth the instant you seal the deal. “It’s a longer-term play,” Tassell said.

Make sure the numbers add up on an investment property

Deciding which property to buy is just as important as determining how to finance it. Not all properties are profitable. You have to do the math to make sure the rental income covers expenses.

Your return on investment includes repairs, property management costs if you hire a company, and if the home is vacant for a few months between tenants.

“The number one error that investors make is underestimating the cost of renovations,” Tassell said. “They always will cost you more than you thought.”

The last thing you want is for bills to be accumulating on empty rentals.

Tassell suggests consulting with a real estate agent, a bank that specializes in investment properties, and a real estate association to make sure that the numbers all add up.

“Admit that you don’t know what you don’t know and ask people who already are doing it for advice,” he said.

You also have to be honest about your own abilities and expectations. Do you want to manage the property yourself? This could mean taking calls about a stopped-up toilet at 2 a.m. on a holiday weekend.

Hiring someone else to do these tasks will cut into the bottom line but may save you some stress.

Advantages of owning an investment property

Tapping into your existing home equity through a cash-out refinance or HELOC to purchase a rental property may make financial sense for you. Every situation is different. That’s why it’s important to speak with an accountant or financial advisor and run your numbers.

Some of the perks of owning an investment property are that along with providing rental income, they also typically appreciate in value over time.

They can also provide tax advantages, including deprecation and write-offs for repairs, renovations, and maintenance.

Once you’ve mastered the purchasing process, you may be able to leverage the equity in each additional property to buy more.

Miguel Mouriz NMLS# 283155