Unlock Rental Property Equity with a Cash-Out Refinance

Unlock Rental Property Equity with a Cash-Out Refinance

Are you like most foreign real estate investors? 50% of all foreign buyers paid cash for their properties last year.

While your cash may feel like it’s trapped in a house’s equity, it doesn’t have to be. Think of your rental property as a treasure chest. A cash-out refinance is the map to unlock it.

A cash-out refinance helps you take out equity from your property and put it into your pocket. The best way to learn the ins-and-outs of cash-out refinancing is by exploring some of the most common questions foreign investors ask. That way, you’ll have the information you need to see if this is the right option for you.

How does a DSCR cash-out refinance work?

When cash-out refinancing, lenders will typically let you borrow at 70% to 75% loan-to-value (LTV). Let’s say that you paid cash for a house that is now worth $500,000–that means you have $500,000 in home equity. Your lender may be able to give you a mortgage for $350,000 (70% of $500,000), leaving you with $150,000 in cash at closing. You can then take that money to save or spend elsewhere.

Another consideration is the property’s performance as a rental. The debt-service-coverage-ratio (DSCR) of the property is based on how much rental income the property generates when compared to its monthly mortgage payments. Lenders usually require DSCRs above one, meaning that rental properties with positive cash flow after all expenses are often eligible for this type of loan product.

DSCR cash-out refinance guidelines

In addition to generating enough rental income and having sufficient equity, there are other requirements that must be met. Many of these overlap with the requirements for getting approved for a mortgage. Here are some of Waltz’s general guidelines:

• Minimum loan amount: $100,000
  
  
• Loan-to-value (LTV): 70% to 75%
  
  
• Property type: DSCR loan refinances are available for up to four units when working with Waltz. This includes property types such as single-family homes, condos, townhouses, and small multi-families.
  
  
• Cash reserves: Lenders often want to see a certain amount in cash reserves to make sure you can keep up with monthly payments. When you complete a cash-out refinance, this may be factored in prior to receiving your payout. Depending on your situation, this amount may vary. As a best practice, investors should consider having at least six months of mortgage payments in reserves.
   
• Property appraisal: Lenders also require recent and accurate property appraisals to confirm that the property meets lending requirements.
  
  
• Loan terms: Waltz offers flexible terms. As a borrower, it's important to understand how to read a term sheet. Terms include interest rates, repayment period, pre-payment penalties, and any associated closing fees. At Waltz you can work with your account executive to see the best combination for your situation.

When does a cash-out refinance make sense?

As you evaluate your refinancing options, be sure to consider the amount of equity you have. While refinancing to get a lower interest rate can be beneficial to all property owners, a cash-out refinance is more relevant to people with significant equity in a property. You will need a minimum of 30% equity to be eligible, however, it’s important to consider other benefits and costs associated with this option to decide if it’s right for you.

What are the benefits of a cash-out refinance?

A cash-out refinance allows investors to tap into home equity, which you can use for a variety of reasons. Investors who take out a cash-out refinance enjoy the following benefits:

• Leverage: The beauty of real estate is that you can use leverage. Instead of having one house paid for in all cash, you can spread this out across multiple properties– you only need to have 30% in equity on a given property. Imagine that you have $250,000 in cash. You could buy one property for that price. Alternatively, you could split it up to buy three houses with down payments of about $80,000 on each.
  
  
• Scale: It can take a long time to save up money for a down payment for an investment property. A cash-out refinance allows you to recycle your initial investment into new properties.
  
  
• Renovations: The cash you receive during a refinance and be reinvested into the property or other rentals that you own for value-add repairs. This can further increase your equity position on existing assets.
  
  
• More cash on-hand: When you complete a cash-out refinance, you don’t need to reinvest the proceeds. You can use the money however you please.

In addition, you may benefit from a lower interest rate when you refinance. However, this is subject to current market conditions.

See how an international investor unlocked equity with DSCR refinancing.

What are the drawbacks of a cash-out refinance?

Getting a cash-out refinance makes sense for many investors. However, there are some potential drawbacks to consider before committing to a cash-out refinance. Here’s what you should keep in mind: 

• Closing costs: When you refinance, you are closing on a new loan. You’ll need to pay closing costs and potentially other fees related to this process. Be sure to weigh this into your analysis as you consider refinancing.
  
  
• Higher loan amount: You benefit by capturing equity stuck in a property. The tradeoff is that you’re likely refinancing at a higher loan amount than you originally had on the property. This means that your monthly mortgage payment  might be higher. It’s up to you to decide if receiving a lump sum of cash now is worth the larger monthly payments.
  
  
• Longer loan terms: A cash-out refinance takes the place of your existing loan (if you have one). As a result, it might extend the time it takes to pay off your mortgage.

Which refinancing option is best for you? Choosing between rate-and-term vs. cash-out options.

How much equity can you take out of your property?

The size of your refinance depends on how much equity you have. Lenders usually require foreign investors to keep a minimum of 30% equity in the property when refinancing. Anything above that amount can be taken out in a refinance.
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Explore refinancing options for you.

What documents are needed for a cash-out refinance?

The cash-out refinance process is similar to applying for a new mortgage. Lenders will request a variety of documents to determine whether or not they’re going to approve your loan.

Most lenders require borrowers to provide a U.S. credit score (FICO) and U.S. based income. In addition, borrowers without an American ID or U.S. Social Security numbers might run into documentation issues with some lenders. As an international investor, you may not have this information to provide. 

Refinancing doesn’t have to be overly complicated--at Waltz, we don’t require these. You can typically apply for a cash-out refinance with the documents listed below:

Identification

Borrowers can apply for financing with your passport. This will be used for authentication purposes.

Proof of income

Waltz will review your rental property information such as your lease. In regards to your personal income outside of the U.S., we typically review recent bank statements, investment statements, and sources of income (job or business). Keep in mind that our requests may vary depending on your financial situation.

LLC with an EIN

It’s important to note that DSCR loans are issued to businesses, not people. This is because DSCR loans secure financing against the property’s income-generating potential rather than your personal credit.  As such, your lender will request information such as your LLC’s operating agreement and EIN.

No LLC? No problem. With our Investor Kit, Waltz helps you create an LLC and EIN in as little as 20 minutes, so you can get your DSCR loan approved faster.

How long does a DSCR refinance take?

There’s typically a six month seasoning period for an existing loan before you can refinance out of it. If you paid cash, this doesn’t apply– you can refinance at any time. 

Once the application process starts, the average lender will need 30 to 45 days before getting a cash-out refinance approved. By providing a fully digital application process and remote KYC for verification, your refinance doesn’t have to take this long. With Waltz, foreign investors can close in as little as 14 days.

Explore the refinance process.

Take the next steps to refinance your investment property

Cash-out refinancing can be a powerful way for investors to scale and reinvest. As you prepare to refinance, it’s crucial to find a lender who specializes in working with foreign nationals. A lender who understands your needs can streamline the process and help you move quickly. That way, you can start expanding your investment portfolio without delays.

Refinance today!

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