Cash Out Refinances on Rental Properties

Why do banks like doing
cash out refinances on a rental property? That’s today’s video. Let’s get into it. Hey there, I’m Clayton Morris. I’m the founder
of Morris Invest. I’m a longtime real
estate investor, and this whole
channel is devoted to helping you become a
better real estate investor and creating passive income. And today I want to talk
about passive income and why banks like
giving money over to you when they see that your
rental property is performing and is producing cash. So you probably think
about getting a mortgage on a rental property. You probably think about,
hey, I don’t own it yet. I’m going to go to the bank,
they’re going to give me money, and I’m going to buy it. Yeah, that’s one way to do it. But the way that the
banks really like is when you’ve already bought
it, maybe using your own cash, so you have some
skin in the game. You own that rental property. Now you do what’s known
as a cash out refinance. So what you’ll do is
you’ll go to the bank and say, hey, folks. I’ve got this property, and
guess what, I’ve already renovated it using my own cash. And I’ve got a tenant in the
property with a year long lease or a two year lease
or a five year lease. And it’s producing 800,
900 dollars a month in positive cash flow. And that banker is going to
look at you and say ding, ding, ding. Whoa, yes, I’ll go
for it right now. So there’s a couple of
things at play here in why they like doing it this way. Number one, it’s the
cash flow, right? It’s an asset that they
see is performing already. It’s not the promise of it
performing, as in scenario number one before you buy it. No, it is performing. They can see the lease. They’re going to want to
see the lease agreement. And they’re going to want to
see your bank statements to see that this tenant pays on time. So that’s number one. Number two, they
like to know that you have some skin in the
game, that you’ve actually already purchased the property. That shows them good faith that
you believe in this property. And therefore, they’re
likely to believe in it too. So those are two big
things going for you. The other great benefit of
it is that they’re really going to look at
the asset itself, the property itself, and they’re
going to care a little bit less about you as the investor, as
you the person that’s paying it back. Why? Well, number one– the tenant
is paying them back in a way, if you think about it. The cash flow from that tenant
is going to cover the mortgage. And I’ve talked to a number
of bankers that said that they would take that scenario any day
of the week if they could look on paper and see that the
mortgage they’re about to give you is going to cost
you $350 a month– that’s what you’re going
to have to pay the bank– but you’re bringing in $900
a month from the tenant. That’s a no brainer. That is a no brainer to a bank. And right now, your
local banks and frankly, the large national banks are
scrambling because interest rates are so low. They want business, but
under the federal rules for what they can
lend on the front end before you own the property,
it’s very, very stringent. You can thank the
Dodd-Frank law, you can think all sorts
of moves in Congress given the 2008 crash that make
it difficult for you to acquire the property using a bank. But once you do own it
and it’s cash flowing, now things loosen up a little
bit in the banking quarters. And they want that business. They want you to put
your money in their bank. And they want to be able
to make some money off of your property. It’s a no brainer. So that, my friends, is
why banks love doing cash out refinances on properties. And hey, you could
even go ninja level and take a bunch of
your rental properties, maybe bundle it together. Maybe you’ve got
five or 10 of them. Many of our investors do that. They’ll buy five
properties with us. They’ll do a cash out refinance,
get the money right back out, and buy five more. And then use that money
to pay off the first loan and they snowball it. And that’s how, my
friends, the rich get richer using this strategy. It really is an
amazing strategy. And guess what? The banks like it. There you go. That’s today’s
video on why banks like doing cash out refinances. I’d love to hear your comments. You can put them in
the thread below. And please subscribe
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here next time with another video, everyone. Have a good one.

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