You real estate investments are hopefully going to rise in value – and that creates this magical tool called “equity”. This increase in equity is an asset you may want to tap into, particularly with cash-generating Short-Term Rentals (STRs). There are two primary ways to free up that equity: Either sell your properties or go for a cash-out refinance.
You may not be so quick to part from your primo properties, so let’s delve into option 2, the cash-out refi. This post explores what it is, how to maximize its value, and understand Loan-to-Value (LTV) ratios in this context.
Before we go any further, it’s time for some self-promotion!: Diggifi does STR loans, including cash-out refi’s! Get in touch with us here for a quick, free loan consult.
What is a Cash-Out Refinance? 🤔
A cash-out refi is a financial strategy where you replace your existing mortgage with a new one for a larger amount than what you currently owe, and then receive the difference in glorious cash.
This method is particularly advantageous for STR investors, whose properties can be more lucrative than their long-term equivalents. Cash out refi’s allow you to unlock the equity you’ve built up in your property without having to sell it – rather, by proving the value of operating your asset as an STR and generating the higher income levels associated with this strategy. It’s the equivalent of having your cake (=cash out without selling the property) and eating it too (=ongoing, high rents).
The STR “Awesomeness Conundrum”.
In the STR world, we operate in an industry that’s filled with visionaries – and kudos to us! When you first acquire a property, you have a vision as to how you’re going to ensure it’s an awesome guest experience, whether as vacation destination or mid-term rental. It’s going to be so awesome, you’re planning to be flooded with tenants. However, at that early moment when you’re first buying the property, you may not have STR incomes yet that prove your vision. Further, even a STR-friendly lender may be cautious to underwrite based on overly-high rental income estimates. So, even that STR-friendly lender will rely either on historical rents at that property. If you’re lucky, the lender may accept rental estimes from data providers like AirDNA or Rabbu.
How to prove your value?
You prove it based on 2 simple words – “Operating History”. You run your STR to its full potential, prove that your business plan works….and then that same STR lender will have newfound appreciation for your property, its value and its DSCR potential. That changes things, and makes the lender more willing to maximize loan proceeds, including allowing you to cash-out without selling.
Steps to Maximize Value in Cash-Out Refinancing 🚀
Improve your Nightly Rates: Higher rates will prove your property has higher debt-service capability than originally underwritten. That drives your appraised value up.
Property Appraisal: Ensure your property is appraised to determine its current market value, ideally with an STR-friendly appraiser. The higher the value, the more cash you can potentially access through loan proceeds.
Improve Property Value: Before refinancing, consider making upgrades or renovations to increase the property’s value.
Understanding LTV Ratios in Cash-Out Refinancing đź“Š
LTV, or Loan-to-Value ratio, is a critical factor in a cash-out refinancing, as with all financings. It’s the percentage of your property’s value that you can borrow against.
Typical LTVs for STRs: There are no guaranteed or standard LTV ratios for short term rentals,, but rough numbers for cash-out refinancing LTVs (in today’s market) range from 70% to 80%. For instance, if your property is valued at $300,000 and you have a LTV of 75%, you could potentially refinance for up to $225,000, and only have to come out of pocket for $75,000.
Maximizing LTV: To live your best life….we mean LTV, you must maintain a good credit score and a strong rental income history. Even though asset-backed loans shouldn’t be as reliant on your credit, lenders view credit and income history as indicators of your ability to repay the loan.
Getting to your best Bottom Line on Cash out Refi’s:
Cash out refi’s are all about drawing maximum loan proceeds from a property, at DSCR levels your income can comfortably support. As reviewed above, this depends on 3 factors: (a) Proving STR income potential, based on strong operating history…(b) translating into high property valuation backed by an STR-savvy appraisal firm and (c) combined with a high LTV justified by high DSCR and strong investor history.
Quote of the Day 🌟
“In the dynamic dance of real estate, it’s the unseen potential that leads the way to financial success.” This quote, aptly spoken by renowned real estate strategist, Martin Keller, encapsulates the core philosophy of cash-out refinancing.
Conclusion: Your Next Step with Diggifi 🌟
Taking advantage of the value in your STR investments through cash-out refinancing can be a smart move. To further explore how your portfolio can benefit from this strategy, we encourage a personalized consultation with a Diggifi loan consultant. Click here to start your journey towards financial growth with Diggifi!