With the “perfect BRRRR” getting increasingly harder to find and the fed increasing interest rates multiple times a year, the financing world we’ve lived in the last decade or so is over. Many landlords have built their portfolio using the power of cash-out refinances but now the threat of cash-in refinances is very real.
IN THIS EPISODE, YOU’LL LEARN:
- What type of financing is at particular risk of a cash-in refinance
- What to do to prevent a cash-in refi
- How to evaluate deals in an increasing interest rate environment
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What type of financing is at particular risk of a cash-in refinance
Short terms loans – whether they are ARMs (adjustable rate mortgages) or balloon mortgages are common for investors to use – especially if you invest using an LLC. If you took out one of these loans at the rock-bottom interest rates we’ve had over the past few years. You might be up for a very unpleasant cashflow surprise when the super-low locked-in rate expires.
Fear not! Use the tips in the next section to prepare for the impending interest rate hike.
What to do to prevent a cash-in refi?
So what’s a landlord supposed to do to avoid the dreaded cash-in refinance? Here’s 3 tips you can use to make sure you don’t end up in a financing bind.
- Increase rent regularly and reasonably
Commercial loans consider the income a property generates when valuing the property. When it comes time to refinance you want your property to be a valuable as possible so you can maintain the property debt-equity ratio. Banks won’t consider prospective or market rents, they consider the actual rent. So make sure you aren’t skipping your annual rent increase.
2. Don’t overleverage your properties.
It can be tempting to take out every penny a lender is willing to give you. But by taking out less, you’ll have a safer equity position down the line.
3. Have cash reserves
You already have reserves set up for vacancy and capex. Now make sure you’ve got a floating fund for refinances. Should you not need the money down the line, you’ve got a built-in savings account for a downpayment on a new property or just a nice like pay day for yourself!
How to evaluate deals in an increasing interest rate environment
Audit your deals by evaluating the cashflow under current interest rates but also using higher interest rates. You want to make sure that when it comes time to complete the BRRRR or refinance your balloon, that the property is still going to be worthwhile.
You’ve got to be more conservative to ensure the valuation and cashflow will still be there come refinance time.
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