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Once you begin investing in real estate, where do you go?
One of the most frequent questions new investors share is how are they supposed to continue investing after they have bought their first property? While there are plenty of avenues to get the financing required to invest in new properties and improve upon the ones you have, few of them can be compared to the advantages of refinancing your home.
So, how can refinancing help you continue to invest? Before you read this article, if you want a direct one-on-one explanation with clear examples, click the link below for a free strategy call with our team at LendCity today.
What is Refinancing?
Refinancing a home loan is the process of taking your existing mortgage on a property and exchanging it for a new one with an updated rate and term. This is done by using the new mortgage to pay off the remainder of the first mortgage, thus transferring the debt onto the new loan. People frequently use refinancing as a method to reduce their repayment terms or get lower interest rates on their properties. However, it can also be used to pull out some of the equity built up in a property.
There are two primary types of refinances that people use.
Rate and Term Refinancing
A rate and term refinance is exactly what it sounds like. By getting this type of refinance, you are making an effort to secure a lower term and interest rate on your mortgage.
For example, if you have a 25-year mortgage at 4.5 per cent, but there is a mortgage product available at 3.5 per cent over 15 years that you may qualify for, you can try to refinance to secure the new rate and term in exchange for paying more towards the principal loan each month. This can help you pay off your mortgage faster and save money so you can focus more time on investing.
A cash-out refinance is the process of reworking your mortgage loan to receive a portion of the equity built in your home as cash. This can typically be done up to 80 per cent of the value of your home when combined with your current mortgage debt.
Instead of saving money, a cash-out refinance is giving yourself the opportunity to reclaim the equity you have built and use it for yourself. By doing this you will have to agree to higher monthly payments and/or a longer repayment period on the home.
In order to perform a cash-out refinance you have to have built more than 20 per cent equity in the property you are refinancing.
What is Equity?
Home equity is the current market value of a property. When a property is purchased, the equity in that property is purchased as well. However, if you buy a home using a mortgage loan, the lender has an interest in the home until the loan has been repaid equal to the outstanding balance.
Homeowners build equity by making their mortgage payments, as well as making improvements to their property – otherwise referred to as ‘sweat equity.’
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How You Can Use Your Equity to Continue Investing
So, now that you have an understanding of equity and how you can pull that equity out, it is time to see how it can be used to help you continue investing.
Renovating Current Properties
One of the easiest and most common ways that people use equity to continue investing is by using it to renovate their current properties. By taking the money pulled out by refinancing and using it to pay for updates and repairs on their home, they increase the overall value of the property, allowing them to build even more equity in the property.
When you are refinancing to renovate and update a property, it is highly recommended that you look into which updates and repairs will maximize the new value of the home. This is especially true if you are planning to sell the property once updates are completed. Two areas that you can renovate which frequently create a large return on the investment are the kitchen and bathroom.
However, if you are refinancing with the intention to sell the property, make sure you communicate this with your broker beforehand so you can reduce or avoid fees and penalties that can be incurred at the time of sale.
Buying New Properties
Alternatively, if you are looking to continue investing by expanding your portfolio, you may be interested in using that equity to buy new properties. Depending on the amount you are able to pull out at one time, the cash received during a refinance can be used to put a down payment and make repairs on one or multiple new investment properties.
This strategy is the basis of many investment methods including the BRRRR method due to its versatility and potential to scale over time.
Investing in Your Business
Finally, you can use the equity pulled out during a refinance to invest into the business side of your investments. This is a strong option for investors who are still setting up their primary infrastructure and need to hire property managers and staff to help them manage and locate new investment opportunities.
For example, in order to streamline your property management organization, you could use these funds to purchase new software to organize tenant and property information. Or you can use it to purchase tools and equipment to help renovate your properties without relying on contractors or maintenance workers to provide their own – which can often increase the cost of their services.
So, if you are ready to refinance your property to continue your investment journey or would like to learn more about the world of real estate investing, feel free to contact us at LendCity. A member of our team would gladly answer any questions you may have and get you started on the road to financial freedom. You can give us a call at 519-960-0370 or visit us online at LendCity.ca Alternatively, click the link below to book a free strategy call with our team at LendCity today.