Refinancing a rental condo?

[Misa N.]

My plan is to borrow money from family to buy a condo with cash that I intend to rent out  longterm. That way I'd get a leg up on other offers and better price (the condo community I'm looking to buy in is pretty competitive). Then I plan to refinance the condo in order to pull money out to pay my family back.

I've never done this before so have some questions. (1) is it pretty easy to refinance a rental condo? I know financing an investment property is hard and even more hard if the investment property is a condo so I just want to make sure I don't run into any issues. (2) Are the rates comparable to if I had financed the condo in the first place for the purchase? Ive already shopped around for rental condo financing so know the rates. (3) will I be able to deduct the interest from the refinanced loan from taxes? 

Thank you. I appreciate any input/feedback. 

[Nicholas L.]

Hi @Misa N. this will only work if you factor in the true cost of buying, holding, and refinancing, and you will not be able to pull out all of the cash you put in unless you can drive the value of the condo up somehow.  You'll pay closing costs when you buy - even if you're buying with all cash - and you'll pay closing costs again when you refinance.  And when you refinance, you'll only be able to pull out some percentage of the value depending on the lender.  To use simple numbers: if you buy for $100K, you will not be able to simply pull $100K out a year later.

(1) is it pretty easy to refinance a rental condo? 

If it's an investment property, rates may not be as favorable as on owner occupied.  Get multiple quotes from lenders to see what they'll offer you.

(2) Are the rates comparable to if I had financed the condo in the first place for the purchase?

It depends.

(3) will I be able to deduct the interest from the refinanced loan from taxes? 

Interest on a loan is part of your operating expenses. So if your rent is $1000 a month and your PITI is $600, your net income is $400 a month (I'm excluding real, important costs like repairs and vacancy here to make this example simple - do not exclude these costs when running actual rental scenarios). Then, when you file your taxes you can include depreciation on the property as an expense to further reduce any taxable income you might have. But you need to run all these numbers in advance to make sure this makes sense for you.