SS214: Maximizing Wealth Through Property Refinancing Strategies

SS214: Maximizing Wealth Through Property Refinancing Strategies

Property refinancing is a powerful real estate investing strategy. In this episode, Charles discusses how to maximize investment returns by using refinancing.

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Talking Points:

  • Refinancing is a powerful, tax free, real estate investment strategy that allows investors to unlock valuable equity within their property. There are a few reasons why a property owner would refinance an investment property.
    • 1. Rate-and-Term Refinancing
      • Investors are able to save money by refinancing to a lower interest rate.
      • When you reduce your debt servicing, it will increase your cash flow. This allows investors the ability to pay down the loan faster, add additional money to their reserve fund or invest elsewhere.
      • The caveat here is to verify that what you will save on interest justifies the fees associated with refinancing.
    • 2. Cash-out Refinancing
      • Investors are able to withdraw equity from their property by replacing their current mortgage, if any, with a higher balance one. This is typical with investors who have owned a property for a while and possibly their loan term is ending and they need to refinance or sell. When they refinance however, the property has gone up in value so they are now able to extract some cash during the refinancing without overleveraging the property.
      • For example; an investor bought an apartment complex 10 years ago for $500,000 and obtained a $400,000 mortgage with a 10-year term. 10 years later, the property is now worth $800,000 and the mortgage has a balance of $350,000. When the investor refinances, they obtain a mortgage for $500,000. After paying off the original loan of $350,000, they take out $150,000, tax free, and the bank has no issue since the new loan-to-value is still only 62%.
      • This investor can now use the $150,000 for performing renovations or investing in another property.
    • 3. BRRRR Strategy Refinancing
      • BRRRR stands for; buy, rehab, rent, refinance and repeat. This strategy has gained popularity over the last few years and works best with investors that are buying actual distressed properties, and adding a lot of value. This is because the whole strategy hinges on the refinance aspect and you cannot refinance and extract your original cash from the deal if not enough value was created.
      • For example; you purchase a property for $100,000. Most likely financing it with a short-term hard money loan and invest $35,000 into the property including all of the financing and closing fees. You rent the property and contact a local bank to refinance it. The bank will give you a 70% loan-to-value on the refinance and since the property is now worth $200,000; they will lend you $140,000. You are able to pay off the hard money lender, recoup your construction funds, pocket $5,000 while still owning the property that is hopefully cash flowing. The strategy continues as you repeat and keep recycling your cash.
      • A couple possible drawbacks could be that the completed deals will usually not cash flow that much since you are max leveraging them, but you still have a property with a renter that is probably covering most of the expenses.
      • One bad deal can pause this investment strategy or if there is a dip in the market, lenders might tighten their lending guidelines; offering a lower loan-to-value which might make refinancing and extraction of all your upfront capital not possible at that time.
      • The main benefit here is not quick up front cash but, the wealth building that occurs when you buy and hold investment properties for years.
    • 4. Portfolio Refinancing
      • For investors with multiple properties, refinancing with a portfolio loan usually allows investors to obtain better loan terms and a lower rate.
      • Many lenders will shy away from small loans but, when you have several properties that are valued over $1 million collectively; more lenders are now interested in making that loan. Borrowers are usually able to obtain a lower rate on a portfolio loan verse a number of individual loans.
      • Portfolio loans are cross-collateralization. This is where it gets risky. One bad property can bring down the rest of the properties. This is exactly what happened to a mentor of mine; he had many properties in a portfolio loan and when he started having issues during 2008/2009 the bad properties brought down the good properties since they were all under one umbrella.
  • Investors that integrate refinances into their investment strategy are able to harness their property’s equity in order to achieve more favorable financing, perform property renovations or obtain the cash required to invest in another property. Of course, when you increase your debt, it increases your risk so it is always important to not overleverage properties when refinancing them.
  • If you are interested in learning How to Prepare Your Property for Refinancing; you can check out episode SS157.

Transcript:

Charles:
Did you know you could unlock tax free cash from your properties without ever selling them. Refinancing isn’t just about lowering your mortgage rate. It’s a powerful wealth building tool that most investors aren’t fully using. So welcome to Strategy Saturday. I’m Charles Carillo, and today we’re discussing maximizing wealth through property refinancing strategies. And whether you’re looking to boost your cash flow, fund renovations, or invest in new properties, refinancing is the key to unlocking the equity hidden in your real estate investments. But here’s the thing, how do you know when refinancing is the best decision? Can you really use the B strategy to scale your portfolio? What’s the risk of over leveraging your properties during our market dip? In this episode, I’ll answer these questions and break down four powerful refinancing strategies that top investors use to grow their wealth. So stick around this could change your thoughts about property investing forever.

Charles:
Refinancing is a powerful tax-free real estate investment strategy that allows investors to unlock valuable equity within their property. Now, there are a few reasons why a property owner would refinance investment property. Number one is rate and term refinancing. So investors are able to save money by refinancing to a lower interest rate. When you reduce your debt servicing, it will increase your cash flow. This allows investors the ability to pay down their loan faster, add additional money to the reserve fund, or invest elsewhere. Now the caveat here is to verify that you what you will save on interest justifies the fees associated with refinancing. Number two is cash out refinancing. So investors are able to withdraw equity from their property by replacing their current mortgage, if any, with a higher balanced one. Now this is typical with investors who have owned property for a while and possibly their loan term is ending and they need to refinance or sell.

Charles:
And when they refinance, however, the property has gone up in value. So they’re now able to extract some cash during the refinancing without over leveraging the property. For example, an investor bought an apartment complex 10 years ago for $500,000 and obtained a full hundred thousand mortgage, and they had a 10 year term. So 10 years later, the property, let’s say, is worth 800,000 and the mortgage has a balance of 350,000. So when the investor refinances, they obtain a mortgage for 500,000. After paying off the original loan of three 50, they take out the $150,000 tax free because it’s not income. You’re borrowing, it’s a loan, and the bank has no issue since the new loan to value is only 62%. So it’s very safe for them. The investor gets that $150,000 out tax free, and the previous lender is happy because they got paid off in full.

Charles:
Now the investor can now use the $150,000 for performing renovations or investing in another property. Number three is the birth strategy. So the birth strategy stands for buy, rehab, rent, refinance, and repeat. And the strategy has gained popularity over the last few years and works best with investors that are actually buying stress properties and adding a lot of value. That is, that’s the whole key there. This is because the whole strategy hinges on the refinance aspect, and you cannot refinance and extract your original cash from the deal if not enough value was created. So for example, you purchase a property for a hundred thousand dollars, most likely financing it with a short term hard money loan and invest $35,000 into the property, including all the financing and closing costs. You rent the property and contact a local bank to refinance it. The bank will give you a 70% loan to value on the refinance.

Charles:
Since the property is now worth $200,000, they’ll lend you $140,000. So now you’re able to pay off the hard money lender recoup your construction funds, pocket the $505,000 while still owning the property. That is hopefully cash flowing. Now, the strategy continues as your VP and keep recycling cash. Now, a couple possible drawbacks could be that the completed deals will usually not cash flow that much since you are max leveraging them, but you will still have a property with a renter that’s probably covering most if not all of the expenses. Now, one bad deal can pause this investment strategy, or if there’s a dip in the market, lenders might tighten their lending guidelines, offering a lower loan to value, which will make refinancing an extraction of your original upfront capital, not possible at that time. Now, the main benefit here is not quick upfront cash, but the wealth building that occurs when you buy and hold investment properties for years.

Charles:
Because what you’re doing is you’re using the sweat equity that you’re putting into the deals for long-term wealth building. Number four is portfolio refinancing. So for investors with multiple properties, refinancing with a portfolio loan usually allows investors to obtain better loan terms and a lower rate. Now, many lenders will shy away from small loans, but when you have several properties that are valued, say over a million dollars, collectively, more lenders are now interested in making a loan. Borrowers are able to obtain a better lower rate and a portfolio loan versus a number of individual loans. So they’re paying one loan at the end of the month. Now portfolio loans are cross collateralization. This is where it gets risk. One bad property can bring down the rest of the properties. Now this is exactly what happened to a mentor of mine. He had many properties in a portfolio loan, and when he started having issues during 2008, 2009, the bad properties brought down the good properties.

Charles:
Since they are all under one umbrella, investors that integrate, refinancing into their investment strategies are able to harness the property’s equity in order to achieve more favorable financing, and they’re able to perform property renovations or obtain the cash required to invest in another property. Of course, when you increase your debt, it increases your risk. So it’s always important to not over leverage your properties when refinancing them. If you’re interested in learning how to prepare your property for refinancing, you can check out episode SS 1 57. That is SS 1 57. I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs@syndicationsuperstars.com. That is syndicationSuperstars.Com. Look forward to two more episodes next week. See you then.

Links Mentioned In The Episode:

  • SS157: How to Prepare Your Property for Sale or Refinancing

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