Cash Out Refinance

[Jacqueline Segui]

Can a new full time investor do a cash out refinance on their first investment property?  What are the steps to do so?

[Matt Powell]

@Jacqueline Segui A quick search of the forums shows a lot of information on this topic. Just search for your subject line. That said, and disclaimer: I haven't done a deal yet, my understanding is that there's no reason you shouldn't be able to. It would look something like this:

• Find a good deal, one that allows you to buy a property for a price that, after $X amount of rehab costs, will be worth more than the original purchase price plus $X. Using common terminology, one that has an ARV (after repair value) that is higher than original purchase price + rehab.
• Finance the deal. You have a few options, but your most likely path is unconventional financing like hard money, portfolio lender, or a private lender. Unless you have tons of cash, that is. These unconventional loans are typically shorter term than a conventional mortgage, with worse terms and rates.
• Do your rehab. Once complete, you should have some equity into the property.
• Wait a while, most likely. Most lenders require you to wait at least 6 months, sometimes a year, before they'll allow you to do a cash-out refinance. Check with your lender for their specific terms. You could rent it in the short-term to generate some cash-flow.
• After the minimum required time, go to your lender and tell them you're looking refinance. They'll send out an appraiser to determine its market value. The lender will generally give you 80% of the appraised value (sometimes 75%) in a cash-out refinance. You should be looking to refinance into a conventional 30-year fixed rate mortgage.
• Get the money from the bank
• Pay off your original lender
• Pocket the surplus, if there is any
• Start paying your new lender for the conventional mortgage

With simple numbers:

• House in need of rehab for $97,500
• Needs $50,000 rehab
• $2500 in closing costs
• Get a loan from a hard money lender for $150,000
• Rehab the house
• Ask for refinance. House appraises for $200,000
• Bank gives you 80% of $200,000 = $160,000
• You pay off your hard money lender the $150,000 you owe
• You pocket the leftover $10,000
• You're now on the hook for a 30-year mortgage of $160,000 with your new lender

Hope that helps. Again, I've never done it, but it's what I've learned.