Because of rising home values, a lot of homeowners have been wondering if it is feasible to monetize a rental property.
The answer is yes. It might also be a worthwhile endeavor, as opposed to keeping equity tied down to the home. When investors remove the equity from a home, they can keep their investments going, purchasing another home using the equity, while continuing to raise cash flow. If you are not prepared to purchase another home, you have the option to invest your equity back into an existing property. Improve the home to optimize its value, and subsequently, your profits.
This begs the question: how can you optimize a rental property?
THE ONLY CHOICE YOU HAVE ARE TRADITIONAL LOANS
To begin with, if you are interested in tapping into the equity of a rental property, be mindful that your sole choice is a traditional loan. If you aren’t eligible for a traditional loan, then it may be worth looking into alternative or subprime loans, both of which are accessible by lenders. In fact, most lenders have flexible guidelines on loans that are exclusive to property investors.
With a traditional loan, though, it is imperative to understand the following:
- As much as 75% of a home’s value can be borrowed for a property that has no more than four units.
- The home cannot be put up for sale. It may property was on the market over the last half-year, you will be able to borrow as much as 70% of its value.
- To refinance, you need to wait half a year after purchasing the home.
The sole exception made to waiting period rules pertains to those who pay cash for homes. This practice is called delayed financing. A load was not taken out to finance a property originally. As such, if you’re able to prove where the funds came from that were used to purchase the property, and provide evidence that any funds that were used to purchase the home will be paid off, then cash can be taken out of a property’s equity right away.
REQUIREMENTS FOR RENTAL PROPERTY REFINANCING CASH OUTS
As with regular traditional loans, you can expect moderately stricter limitations, including the following:
- Stable employment and income.
- Debt to income ratios are low; ratio of total debt isn’t greater than 41%.
- Proof of between three and six months (at least) of on-hand cash reserves.
- Credit scores are high (ranging between 680 and 700).
CASH-OUT REFINANCING ALTERNATIVES
What happens if you are unable to qualify for traditional Cash-Out refinancing loans? Other options may be on the table, such as:
- Home-equity – A credit line or loan for home equity can be taken out on a property occupied by the owner. Usually, you can take out as much as 80% of your property’s value, and use the money is required. This may entail using funds to repair an investment property for the sake of increasing profits.
- Personal loan – To repair a home, a personal loan that is unsecured might provide some much-needed cash. Your home will not have to be put up as a form of collateral. The funds can be used as required without bank approval.
IS IT PRUDENT TO TAKE CASH OUT FROM INVESTMENT PROPERTIES?
You may believe it is a better idea to have equity listed. In doing so, lenders will be able to see your possession of an asset that is valuable. On paper, though, how does this money help you? If you’re attempting to grow an investment, then cash will need to be taken out of a property, especially if you:
- Are trying to enhance your property portfolio – To grow your property portfolio, some type of down payment will be necessary. Lenders generally ask for 20 to 30% of the down payment on a property when it is purchased for investment reasons. Opening up funds from your property’s equity is an optimal approach to accessing funds.
- Want to repair the home – If you have existing tenants were complaining about the condition of a property, or you wish to have a home fixed up to increase in selling price, equity will be helpful. Equity can be pulled out of a property and invested back into it to enhance your investment.
Ultimately, to enhance your real estate investments, you will require a debt ratio that is low, sufficient assets, and great credit. If you are eligible for a traditional loan, then other options are on the table. Nonetheless, traditional loans provide the lowest fees and interest rates in comparison to other options.