Refinance investment property to expand your real estate portfolio
You've decided to expand your rental real estate portfolio but are short of funds for a down payment. Is it a good idea to refinance an investment property in order to purchase another?
As your equity grows over time in currently held rental properties, it is a tried and true method of expanding your real estate holdings by leveraging one to buy another.
A word of caution, however. It's true that a good way to expand your real estate investments is leveraging one to buy another, if you borrow too much against one property you run the risk of "over-leveraging".
Here's what that looks like.
Your monthly expenses on a specific property total $4,000. Your rental income on this same property is $5,000. Great - you realize $1,000 of income each month.
After refinancing to a larger loan balance, your expenses increase to $4,800.
Based on these numbers, you still have $200 cash flow each month.
But if you have a vacancy, your old $1,000/month cushion has dwindled to $200. One month of vacancy means you'll be dipping in your pocket each month just to cover the overhead on that property.
Is negative cash flow ok?
Many experienced investors believe negative cash flow is acceptable as long as the property is increasing in value and rents continue to rise.
Analyze how long you expect to have negative cash flow and how much is the shortfall each month? How much do rents have to rise to make up that negative cash flow so you are once again "in the black".
After all, making money is the reason you invested in the first place.
You can pull cash out of a rental property but weigh the cost vs refinancing a primary residence.
In either case, you can access your equity in the form of funds for any reason.
Entertainment Mortgage are experts in analyzing investment property and balancing portfolios.
Call 310-429-8070 or book an appointment to talk about your options.