How to Refinance a Rental Property

How to Refinance a Rental Property

How can you refinance
a rental property and pull your money back out? And snowball your investments. That’s today’s video. Let’s dive into it. [INTRO SOUND] Hey there, I’m Clayton Morris. Longtime real estate investor
and founder of Morris Invest. You can learn more in
the description below. I’ve rehabbed hundreds
of properties, and I’ve done a lot
of refinancing over the years to pull money
out of the properties that I’ve rehabbed
and placed tenants in. And also, houses that I’ve
lived in, permanently, as my primary residence, I’ve
pulled money out of those as well. So today, we’re going
to talk specifically about how to get
a rental property, add value to that
rental property, and then pull money
back out of it in order to get more
cash flow by buying more rental properties. That’s today’s video. So first, I want to say
that this channel is totally devoted to helping you become
a passive income real estate investor. If you’re not
already a subscriber, we’re going to do a little
subscribe break here with some music. Hit that little subscribe
button down there, and turn on the bell,
because that’ll let you notified when we get new videos,
which we publish three times a week. Go ahead, take a
little subscribe break if you’re not a subscriber. [MUSIC PLAYING] Thank you. All right. Now back to the content. So today, we’re going to talk
about this refinancing process. And there are four key areas
that you need to know about. Now number one, you may not
be buying a property where you’re going to get a
huge amount of equity after you do the rehab. You may just get a
little bit, right? But that’s OK, because if
you’re able to get money pulled back out from
the bank, that’s money that you didn’t have before. What do I mean by that? I’m just going to say,
for round numbers, let’s just say you bought
a house for $20,000. You did a little bit of repairs,
and it appraises at $30,000. Well, they’re probably
going to give you about 85%, or 80%, or 75% of that 30,
right, as a check to you. Great. It’s not a lot of money. It’s certainly money
though, and it’s money you didn’t have before you
did this refinancing process. So even though you didn’t
add a ton of value, or that property is
not worth $200,000, think of that as free
money that you can then use to pick up your
next rental property. But we’re going to be
talking about numbers in the $40,000, $50,000 range. Those are the properties
that I like to buy. All right. Step one in this process
on how to refinance is simply to find a local bank. I recommend going
to local banks, in your local towns, where you
have your rental properties, and working with
those local banks. They are going to give you
the best refinancing options. Stay away from trying to go
to these big, national banks, Bank of America, Wells
Fargo, those types of places, because no one is going
to know your local market like your local bankers will. So they’ll be able to assess
the value of that property way better than a big national bank. So step one, make
sure you work with, and find, a great bank
in your local area that you can work with in order
to refinance that property. All right. Step two in this
process is to make sure that you’ve got the right
loan that’s right for you. So the bank is going to
say to you, OK, here’s what we can do for you, John. We are going to give you a
loan on this property for 75% of the value of the property. So let’s say, for
round numbers, you bought the house for $40,000. You added a little bit to it,
and it’s worth about $50,000. And they’re going to
give you a loan on that for 75% of that $50,000. And that number is $37,500. Now remember, you bought
the house for about $40,000, but it’s worth $50,000. And the appraisal came
in at about $50,000. They’re giving you $37,500. And the terms of
that loan are going to be four percentage
points, 4% interest. Now think about
that for a second. You bought it for about $40,000. The bank is willing to give
you, basically, almost what you put into the property
in the form of cash, that you can then take and
buy another rental property. Now you have that one available. And done. And you can do the same
thing and rinse and repeat, using the cash flow
from your tenants to pay back these loans. And you want to
stagger them so you’re snowballing that process. It’s powerful, right? Well imagine, if you just
had a little bit more equity, and the house was worth $55,000. You’d pretty much,
almost, be at a wash. The money you put
in is the money you’re almost going to get
right back from the bank. See how this works? Step three, we kind of
jumped the gun a little bit, but wait for an appraisal. So the bank is going to do
an appraisal on the property, and that’s where
they’ll determine the value of that property. So like I said $50,000,
that’s what the numbers we’re working off of in
the terms of the loan. So if it’s worth
$50,000, they’re going to give you an
interest rate of about 4%. And the value– 75% of the value of the
property is the loan that they’re going to
give you for $37,500. So you’re going to
wait on this appraisal. Now appraisers can
be a tricky beast. I’ve got a whole video
here on appraisals and how to work
with appraisals that come in low, how to fight an
appraisal that seems like it’s ridiculous and way off base,
so check those videos out, because you may need them. We’re in a weird situation right
now with appraisal shortages across the country, and a
lot of companies and banks are having to bring
appraisers from other states into their state to do
appraisers– appraisals. Which is crazy,
right, because you think that the appraisal would
come in from an appraiser who lives in the area, knows
the area, knows the streets, knows the value. And a lot of times, they’re
bringing in appraisers from out of state. It’s not making for a
great situation right now. But you need to know
how to fight them. You need to know how
to talk with the bank, and say, I think your
numbers here are way too low, and here’s why. So I’ve got a couple
of videos I want you to watch on that exact topic. So step three, though, is to
get that appraisal back and see how it matches up with what the
bank is going to do for you. And step four is pretty simple. Step four is simply
to close on the loan. Now you’ve got a loan
on that rental property that you own free and clear. Now the bank is going to give
you a check for that amount. There you go. Now you’ve got that $37,500. What are you going
to do with it? Well, I know exactly
what I would do with it. I wouldn’t go buy a boat. I’d buy another rental property. And I would rinse and repeat. So that I would be
able to refinance out of that one using the
cash flow from my tenants to pay back those loans. Remember, every time
you add another property to your portfolio, your personal
net worth has increased. And, especially if you’re
buying them like we do, which is below market
value, adding value so that our net worth is
increasing to $50,000, right? If we’re buying it for
$35,000 to $40,000, $42,000, and it’s worth $50,000, $55,000,
my net worth is here, not here. So I bought it smart, right? And I was able to
add net worth here. That’s the beauty
of the refinancing and pulling that cash out. But it’s also the beauty
of rental real estate. I hope you found
this video helpful. We have a whole series of
videos on private money, turnkey real estate, you name it,
right here on the channel. Click the Subscribe
button, right over here, if you haven’t already
subscribed to the channel. We publish videos
multiple times a week, in an effort to try to
get you to take action. Get out there, become
a real estate investor, and create cash flow and legacy
wealth for you and your family. It’s the best way to build
wealth in this country. We’ll see you next
time everyone.

100 thoughts on “How to Refinance a Rental Property

  1. how much do you recommend an investor to put down for a new property ? what would you say if you had nothing to put down ?

  2. Hi Clayton,
    Thank you for this video, but my question is how do you pull out all your money back out after buying a house and rehabing with your own money, during the refinancing period?

    Does the bank agree to give you cash for your money back?

  3. can you please think of a good senerio for a contractor to start buying rentals. how do i get to buying a lot and design build a duplex or triplex.

  4. Hi Morris , I have a question , when you calculate your ROI are you including in the 40% the amount of money you are taking from your cash flow to pay off the loan that you took from the bank to buy your second property ? Thanks , great video , I'm saving enough money to invest with your company in the future

  5. Best Channel I ever came across! Anyone reading this should subscribe!

    Clayton, quick question! I am from the UK (think you recognise my posts by now) and am relocating to Houston.
    ……So, In the UK as a landlord, we calculate the utility costs as paid for by the tenant (we also have Council Tax which the tenant pays, covers rubbish etc). Can you let me know as I am practising my cash-flow and ROI calculations (or a video would be awesome) who generally covers these costs, the tenant or the landlord? Basically, I am trying to get a solid grip on operational costs Vs. rental income to know how to better see my operating income and if any given property becomes an asset.

    Many thanks, keep up the awesome work! Hope to one day do business with Morris Invest!

  6. it just seems as the 420 after accounting for 40% of 700 cashflow will be lowered to about 100 bucks. seems like all the homes will have loans that will cut into your cashflow

  7. Clayton, when you repay the HELOC on the newest investment property, do you pay a set amount of interest plus principal or deposit the entire rent check ? thanks much. love the videos

  8. 1 thing u missed long must u wait before askin bank for refi.."seasoning"? largr banks require 12 months.

  9. Would it be a good idea to buy a distressed house with the owner willing to do owner financing and then rehab to build equity then refinance ? I'm thinking This option would be a good option considering you avoid having to find a hard money lender and avoid the bank until you have the equity to refinance. Is it a good idea When it comes to buying a house with owner financing and would it work going this route ?

  10. thanks Morris, I have watched you for years without knowing that you were in to investment properties. Then I saw you on bigger pockets podcast and I became even more of a fan. Great video I found this just as I was thinking of refinancing myself, and starting a second investment property.

  11. great vid it seems like you may have to add some $ onto the re'finance $ to get another property also what's a good way of getting to know my local market?
    thanks for the vids

  12. No one talks about the fact that once you get like 3 mortgages you won't qualify for anymore. So you can't repeat more than twice.

  13. Love your info but just one problem. Your prices for houses are so low. I'm stuck with high priced rentals in California. Wish I could get houses for 50K like you say.

  14. Does refinancing only work when you own the property free and clear? What if you had to take out a loan or get an investment you have to pay back to buy the first property?

  15. Where are you getting 4% on an investment property? I was just quoted 6.875% in Oct 2017. I was told we would get a better rate -2.5% or more on our personal property. I have a rental property that is nearly paid for where I have over $100k less than 1.5 yrs remaining on mortgage and a double I live in that which has around $100k in equity, which has another 12.5 yrs on the mortgage.

    If I were able to take $100k out of one and invest it in Rental Income with Morris Invest, which property would you suggest and what could I expect for positive cash flow each month?

  16. Thank you for the video. I have a clarifying question, do I get a loan against the X % of the appraised value of my rental property or just X % of the equity (value minus loan) I hold in the property?

  17. Hey Clayton, to refinance do they look more at the house/ equity or do you still need to qualify with income and proof of funds?

  18. Hey Clayton You may have talked about this if so let me know were to look.We buy houses in the midwest and we live in CO.You say to work with my local bank in co to refinace my rental in for example Ohio.They are going to refinace my house if its free and clear out of state?Also alot of banks have a minimum amount of value before they will refinance a house how are you getting around that with first house purchase?Thanks

  19. You're not being clear about net worth. Your net worth increases with your equity. If you buy a home using a loan for 10000 and it's worth 15000 your net worth increases 5000, not 15000.

  20. Hi Clayton – I'm a big fan of your podcast and these videos. My question on this video is this. Does this also apply if you own the house in an LLC? I was under the impression that most banks won't lend to LLCs. This is a strategy that I'd like to implement and the LLC thing concerns me. Thanks.

  21. Great video Morris. Question for you: what is your cash flow goal when you handle the cash out refinance? If a property cash flows $500/month with 30% initial down and than a year later you do the refinance and are able to take out most of your initial downpayment and in return your cash flow drops to $350/month while still paying off the mortgage by the rental income for example – do you have criteria you try to achieve which each cash out refinance you do? Also what is your opinion on the fact that $4-$5k closing fees are taken out each time you refinance ? Thanks in advance 🙂

  22. As i have followed you for some time I know you buy your properties in an LLC entity, when you refinance with a bank do they let you hold a mortgage in that entity? If so, do they then treat it as a commercial property?

  23. Great channel and valuable information. Quick question on the topic of this video: How do you refinance a rental property that is owned by your LLC?

  24. So I’m questioning myself… if I own a home free and clear and I refinance. Would I have to pay the loan back? Because wouldn’t that basically be my equity? I’m confused.

  25. With this method I start off owning the home free and clear. Then I buy a house pull it it refinanced. Now I have 2 mortgages then 3 , 3 etc. what method do I use to pay these off?

  26. Clayton, could you give a specific example of a property worth $20k-$60k, rate, length of the loan, rental amount, loan type, and amount due on the loan every month so I have a better understanding of the exact mechanics of this?

  27. Where you find those houses for 20-50k$. Which state you operate in. I'm from Canada but never heard about such a low prices.

  28. Clayton, What do you think about refinancing your primary mortgage, pulling out money about 80k and getting 2 props like that?

  29. is there any limit to how many times you can do this and how does it work if you bought the property with a loan and not outright with full cash.

  30. Wow! Great advice, thanks for sharing!

    I'm just a little confused on the snowball effect. Do you refinance the second property to pay off the first property's loan, then use the remaining cash to buy another property? Or, use all of the cash-out refinancing money to buy another rental property, while you keep the mortgage on your first property, allowing the tenant to pay the mortgage over the next 30 years?

  31. Hello Clayton , I agree this is the best channel and am looking forward to doing business with you in the future. I have a quick question, let's say I just bought 2 houses with a Heloc and I have a LLC. Will I still be able to bundle and refinance these 2 homes to take out the 75%?

  32. Hey Clayton, does this refinancing process base on a paid off property? What if I bought a property with 80% loan. What to do with the increased value when I still have the mortgage?

  33. Hello Clayton, when you say refinancing of the paid off home you are talking about getting a HELOC for that house right? Because i thought you can do refinance if you are paying a mortgage. That also sound like Home Equity because you said they cut you a check…would you mind to clarify for me?

  34. I have a rental was at one point primary still pay mortgage 529piti getting 1175 a month owe 57k worth 100k what's your thoughts 🤔

  35. So do I have to find a local bank within the area of the rental property or can I stick with a local bank near me (in a different state) and still get the refinancing?

  36. I don't get it. Please expand more on this…What makes this different from having 40k cash, putting 10k and financing the rest to get a 40k property. Then you buy 4 properties with that 40k instead of buying one, refinancing, another and another?
    Don't you end up with the same result of having your property financed by the bank?

  37. would you recommend a lander who is reputable for this purpose, i have a hous id like to get cash out.tnx

  38. I know it depends on business plan, goals, strategy, etc… What do you think is an acceptable loss in cash flow after refinancing that paid off rehabbed forced appreciation property?

  39. what if you'll end up with only 100$ profit because of all the expenses, property management payments, taxes, loan payments etc?

  40. Hey Clayton, is equity only the difference in value of the home from purchase/rehab/arv? Or say your tenanant pays the rent for a year, can that have a play in how much equity is in the refi also?

  41. My local bank only offers 75% LTV on investment properties (I've seen some go as low as 60% LTV). After closing costs, it rarely makes sense to cash-out refi unless I've built significant equity in the property. Don't get me wrong, it's a great strategy! Just wish more banks were willing to do 80% LTV on investment properties.

  42. Could you do a video on closing cost? Isn’t closing cost a major cost of financing, especially on lower cost homes as a percentage of the cost of the home. Thank you.

  43. From your experience what have you seen in terms of the types of loans that banks issue on investment properties? When purchasing my first rental home the bank would only offer me a commercial loan and said they could not do fixed rate loans on investment properties. Is this typical or should I be looking else where to refinance? My current loan is 5.25 variable with a cap of 11. Any guidance would be greatly appreciated.

  44. There is a hotel that is being used as a multi unit rental which also has a bar and restaurant. It values $750k. The owner is willing to finance 1/2 of it at 5%. How would you go about financing this entire deal?

  45. After what period from buying first rental property, would be great for someone to do refinancing for next investment property?

  46. I bought a house for $40k. Put $12k down and financed. What will my refinance look like? Is it still 75% of $40k? Or 75% of equity after appraisal?

  47. just a question plz anybody…… I dont really understand if i buy house for 20k suppose on 100% finance and then do a refurb and get it appraised for 30k. My mortgage on that was 20k to begin with now i call pull out lets say 80% of that 10k which is 8k……. now i have re-mortgage of 28K- hw is that gud idea? or is it correct? im really confused. im pulling out money which i have to pay back??

  48. Hello Clayton , so I might be getting this a bit confused but when you say 'closing on the loan' that you own free and clear (Loan A). I don't understand how if the bank gives you a refinance loan for that $37,000 (Loan B) and you use it to buy more properties, how will that original loan A be paid in full if they are say a private lender with a shorter term loan. considering that the rental income will only pay the second Loan B. Would help a lot I'm still learning how these refinances work, thank you.

  49. Won’t your monthly obligation go up and your cash flow for that property decrease and although you get another property you also get more debt.dti ratio will prevent you from qualifying for more careful with this strategy

  50. Clayton… love your videos. Long time fan. Question. I’ve heard you say you like Dayton OH as a market to invest. When I do a search it appears that all there is is “D class” properties. Maybe I’m misjudging. Why do you like Dayton??

  51. you have to remember when you bolt the house it cost you 40,000 borrowed + interest. And if there going to give you 60% LTV that's only 24,000 you still have to pay the man you borrow the 40,000 from + interest. I just don't see how it can work.

  52. I am not sure if this is ;applicable to my country. I got a loan from my local bank for 100K and they would like to know where i spend each cent of the 100K to build my house. If the electrician wanted 10K then he would give me the invoice, and i would go to the bank to free me the 10K from 100K to pay him.

  53. So you pay the 75 % ltv back from the first house using the second house monthly income till its paid off the repeat? If you buy cash ?

  54. Over how long do you have to pay the money back you get for the equity in your home? Is it lesser than the money you'll receive from the second units rental income ?

  55. I'm still having trouble fully understanding refinancing. Question: The initial purchase of the home–was that using a loan from the same bank that you refinance with (does it even matter?). I'm asking because then you have the first loan that you are paying a mortgage (+interest) on monthly that is hopefully being paid off by the tenant in the first property that was purchased and rehabbed. Then, while the first property is cash flowing, you appraise the first property and get a loan in the amount of ~70-80% of that appraisal in cash to use for another property to purchase and rehab. Using this second loan (refinance?), you repeat the buy, renovate, rent process, and now you have two loans/mortgages that you are paying off on two properties. Am I missing something? When I write it out like that it makes more sense, but still feeling confused for some reason.

  56. So, when bank gives you the check with the new loan, your are not oblique to spend that money on rental property, you can spend it for example renovation? By friend got refinance on duplex and bank gave him 500k. So he bought 2 single family rentals and the rest put on renovation and rainy days. Is this allowed, to spend that money on anything 😕

  57. Do you recommend buy the property under and LLC, and then refinance under the personal credit to get better rates?

  58. Suppose you bought your rental property cash, how can you get money out of that property to buy more real estate

  59. morris if you had 100k would u buy 2 houses for rental income or would u buy 1 house that gives rentsl income the same as 2 houses. Also wouldnt it be easier if u want to do a cash out refi for just 1 house as ooposed to 2?THANK YOU for ur time

  60. This doesn't help at all, you're just explaining the idea of refinancing which everyone the is already looking for these kind of videos have. why not say how much time to refinance, or how the process works, or does it matter how many properties in you llc portfolio, etc…

  61. Hi Clayton, I found your book on Amazon before I discovered you on YouTube! You produce great content for all levels of investors. I have one question. Would you refi your main resident to get 50,000 to buy your first rental and do Fund & Grow or would you do a HELOC and only have access to 15,000 and rely on finding more investors? I'm leaning more towards doing the total refi requiring less investors unless you see a benefit in taking less money in using the HELOC. Thank you for your valuable time.

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