A Guide to Buying Rental Property with Cash-Out Refinancing in Los Angeles

Los Angeles is more than the land of dreams for those who want to make it on the big screen; it also holds dreams for real estate investors. 

As the United States’ second-largest city, Los Angeles allows real estate investors to grow their rental portfolios, especially those considering buying rental property with cash-out refinancing. 

In the land of opportunity, real estate investors don’t need thousands of dollars on-hand to grow their rental portfolio and acquire new properties. By owning just one property, they have an advantage and cash available, they just have to know where to look. 

With cash-out refinancing, you can leverage the home equity you already have in either your residential home or investment property to buy a new one. 

In this guide, you will learn about the benefits and risks of buying rental property with cash-out refinancing in Los Angeles. 

What is Cash-Out Refinancing?

If you are new to real estate investing and the financial options available, then the concept of cash-out refinancing may be new. 

Cash-out refinancing is when you take out an additional mortgage of more than you owe on your property and use the difference to either buy a rental property or improve your current property. 

For example, if you still owe $150,000 on your property and you do a cash-out refinance of $200,000, you will have $50,000 to acquire or improve your property. 

It’s important to note that cash-out refinancing is only available to property owners who have equity in their homes. 

What is Home Equity?

Home equity is how much of your home or property you own. So, if you have a mortgage of $100,000 and have paid the principal down $30,000, you have 30% equity in your home. 

What Can You Do with a Cash-Out Refinance?

When you do a cash-out refinance on a property, you will have cash from your loan available to use. 

There are a couple of ways you can use this cash. 

1. You can purchase another property, ideally an investment or rental property.
2. Improve your current property to raise its value.
3. Pay down personal debts and loans.
4. Save that money for an emergency fund.

Smart and financially savvy investors might use this cash to either purchase a new rental property for their portfolio or make home improvements to raise the value and rent. 

Cash-Out Refinancing Requirements

Not just any property owner can take out cash-out refinancing. There are strict requirements they must meet to be considered by their mortgage lender. 

The first requirement to satisfy is to have an acceptable credit score. If refinancing an investment property, this minimum credit score accepted can be between 620 and 700, depending on the lender. 

Another requirement for property owners who want cash-out refinancing for their investment property is to have at least 25% of home equity. Anything less than this is considered a risk for mortgage lenders. 

You must also wait at least six months after purchasing a property to apply for cash-out refinancing. 

Lastly, when refinancing your investment property, it’s important to understand that you may only do so with a conventional loan. Government-backed loans, such as FHA loans, do not allow cash-out refinancing for investment properties. 

Cash-Out Refinancing Interest Rates

The average interest rate when refinancing your residential property is between 4 and 6%. However, this interest rate increases by 0.5 to 0.75% if you’re refinancing an investment property. 

It’s important to review the numbers and how they will affect your current payments to ensure you’re making a sound and data-driven decision when growing your real estate portfolio. 

Benefits of Buying Rental Property with Cash-Out Refinancing

Already owning a rental property gives you a major upper hand if you plan to grow your real estate portfolio with cash-out refinancing. When you go this route, you’ll experience the following benefits. 

• Access to Additional Funds – You can avoid dipping into your savings to put a down payment on a new investment property when you get cash from refinancing another property.
• Tax Deductions – If making improvements to your property, you can deduct those expenses from your federal taxes.
• Lower Interest Rates – You may get lower interest rates on your refinancing than other financing options.

Risks of Buying Rental Property with Cash-Out Refinancing

As with any financial opportunity, there are some possible risks. When you decide to buy a rental property with cash-out refinancing, you may face the following risks.

• Take on More Debt – When taking out another mortgage, you will have more debt to your name, which could mean higher monthly payments.
• Foreclosure – With the higher monthly payments, you may face foreclosure on your property if you cannot make them each month.
• Additional Fees – When refinancing, there are closing costs, appraisal fees, and more, which could be between 2 and 4% of your loan.

Is Buying a Rental Property with Cash-Out Refinancing in Los Angeles Right for You?

Navigating the world of real estate investing can feel overwhelming and confusing, especially with all these numbers, interest rates, and terms floating around. 

If this is how you feel, especially when talking about cash-out refinancing to buy a rental property in Los Angeles, then you may want to consider speaking with the real estate experts at Lotus Property Services.

At the forefront, we are a property management company, but we are so much more to our property investors. We’ll help advise you on strategies to grow your real estate portfolio, maximize ROI, and increase property value, all while managing the everyday tasks of operating a rental in Los Angeles. 

Get on board with the savvy investor hack to grow their portfolios and consider buying rental property with cash-out refinancing in Los Angeles. 

If you enjoyed this article, you’ll definitely want to read, A Step-by-Step Guide on Calculating Rental Property Profit Potential, next.