Although it is possible, many investors find that using a traditional mortgage isn’t the best means for attaining rental properties. It can be difficult to qualify for a loan on a low cost property, and banks have rules, regulations, and restrictions that they follow. Thanks to laws like Dodd Frank, and other pieces set in action by Congress, it’s not easy to rack up multiple loans to grow your portfolio.
But luckily, you can still use traditional banks to expand your real estate business. Although they might be stingy with mortgages, banks love to work with investors on cash out refinances. Many of our investors at Morris Invest have utilized this strategy in order to turn one property into a robust portfolio!
What does this mean? You purchase the property with cash first. I know what you’re thinking—“what if I don’t have $50,000 in a bank account to purchase a rental property?” There are other ways to access cash. Check out this list of five ways to finance your real estate deal.
So you purchase the property and have it renovated. Then you get a tenant in the home, and you’re bringing in $700-800 in passive income every single month. That’s when you go to your bank and discuss working with them on a cash out refinance.
My experience has been that when a banker sees this deal come across their desk, they want to take it! There are four major reasons why:
At this point, the property is already a performing asset. They’re not seeing the promise of cash flow, but actual, tangible rental income producing every single month.
You already have skin in the game! Banks like this—they don’t want to lend to someone who hasn’t contributed to the asset. By putting your own cash toward the investment, they are able to see that you believe in it. Click over to the podcast to hear more about having skin in the game.
In this situation, it’s more about the asset itself. Your personal information isn’t totally irrelevant, but the asset is more important. Let’s say your payment on the cash out refinance is calculated at $350, and your rental property is producing $800 a month—that’s a no brainer! It's obvious that they will get paid back, and that's what they care about.
It’s easier for a banker to make this deal happen. Your banker can’t simply loan you 100% LTV for your rental property because they believe in you as an investor. Under federal laws, it’s no walk in the park to get a mortgage. We don’t want another 2008 housing crisis, so this is how we have to operate. Also, your banker has to get the deal approved by an in-house underwriter. There are many components that go into getting a mortgage. But once you own the property, things loosen up a little!
Using cash out refinances is an amazing strategy for growing your portfolio. To learn more, check out our video on the BRRRR Method!