With home values on the rise, many homeowners wonder if it’s possible to get cash out of their rental property.
It is possible and may even be a good idea rather than leaving the equity ‘stuck’ in the home. By taking the equity out of the home, investors can continue their investments, buying yet another property with the equity and continuing to increase their cash flow. If you aren’t ready to buy another property, you can invest the equity right back into the home by making home improvements that increase the home’s value and therefore your profits.
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Just how do you get cash out of your rental property? Keep reading to find out.
Conventional Loans are the Only Option
First, you should know that your only option is a conventional loan if you want to tap into your rental property’s equity. If you can’t qualify for a conventional loan, your next best bet is to look into subprime or alternative loans, which lenders keep on their books. Many lenders have more flexible guidelines for loans that pertain to real estate investors.
Sticking with the conventional loan option, though, you must know the following:
- You can borrow up to 75% of the home’s value for a 1-4 unit property
- The home can’t be listed for sale and if it was listed within the last 6 months, you can borrow up to 70% of the home’s value
- You must wait six months after buying the home to refinance
The only exception to the waiting period rule is if you paid cash for the home. This is called delayed financing. You didn’t take out a loan to finance the home originally. If you can prove the source of the funds used to buy the home and prove that you’ll pay off any loans used to buy the home, you can take the cash out of the home’s equity immediately.
Requirements for Cash-Out Refinancing on a Rental Property
Like standard conventional loans, expect slightly tougher restrictions including:
- High credit scores between 680 – 700
- Proof of at least 3 – 6 months of cash reserves on hand
- Low debt-to-income ratios with a total debt ratio no higher than 41%
- Stable income and employment
Other Options Besides a Cash-Out Refinance
What if you can’t qualify for a conventional loan cash-out refinance? You may have other options including:
- Personal loan – If you need cash to fix up the home, an unsecured personal loan may offer the cash you need. You don’t have to put your home up as collateral and you can use the funds as you need without getting approval from the bank.
- Home equity loan – You can take out a home equity loan or line of credit on your owner-occupied property. You can usually take out up to 80% of your home’s value, using the funds as needed. This could include using the funds to fix up your investment property to increase your profits.
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Is it Smart to Take Cash Out of an Investment Property?
You may think it’s better to have the equity on paper. You can show lenders that you have a valuable asset. But what does that money do for you on paper? If you are trying to grow your investment, you’ll need to take the cash out of the property. This is especially true if you:
- Want to fix the home up – Whether you have current tenants that complain about the property’s condition or you want to fix the home up to get more for it when you sell it, the equity can help. You pull equity out of the home to invest right back into the home and further your investment.
- Want to further your real estate portfolio – If you want a larger real estate portfolio, you’ll need a down payment. Lenders typically want between 20% and 30% down on a home when you buy it for investment purposes. Freeing the money from your home’s equity is a great way to get your hands on the funds.
The bottom line is that you need great credit, a low debt ratio, and plenty of assets on hand to further your investments in real estate. If you don’t qualify for a conventional loan, you may have a few other options, but the conventional loan offers the lowest interest rate and fees out of all of your choices.
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