Advice on getting equity out of a rental in Washington state

[Matt Nelson]

Hello all, first time posting here. We have a rental in Washington state. It is almost paid off. We would like to take out 90k of equity and the property if worth about 250k. What’s the best route to access the equity from the rental? Thanks in advance.

[Drago Stanimirovic]

Hi Matt,

Congrats on building significant equity in your rental property. To access the $90K, a cash-out refinance is likely your best option. This allows you to refinance your mortgage, take out a new loan, and pull out the equity as cash. It’s a straightforward way to access the funds, though keep in mind that interest rates may be higher since it’s a rental.

Alternatively, you can consider a HELOC (Home Equity Line of Credit), which gives you flexibility by letting you borrow against the equity as needed, similar to a line of credit. Another route would be a home equity loan, which functions like a second mortgage, providing you with a lump sum at a fixed rate and payments.

Each option depends on your goals and the terms offered, so it's important to evaluate which fits your situation best. If you’d like help with financing or further advice on your next steps, feel free to reach out!

Best,
Drago

[Craig Warner]

Hi Matt,

Good advice by Drago and I would add the easiest no qualifying option would be to do a cashout refi on a DSCR program. We also have HELOC's and HELOAN's on investment properties as well, even using bank statements as income, if self employed too.

If you'd like to explore your best options, let's talk for a few minutes to determine the best rate and payment strategies.

Thanks

Craig

[Brandon Croucier]

A DSCR cash out refinance at a low LTV is going to be your best bet.

Happy to connect!

[Jay Hurst]

Quote from @Matt Nelson:

Hello all, first time posting here. We have a rental in Washington state. It is almost paid off. We would like to take out 90k of equity and the property if worth about 250k. What’s the best route to access the equity from the rental? Thanks in advance.

 The first question to be able to give you the "best" option is what are you looking to do with the funds?  

[Matt Nelson]

thank you for the replies. Another question I had is we would like to put the property into an LLC. Should I do that first before a refinance or borrowing equity?

[Carlos Valencia]

Hi Matt, 

Depending how much you still owe it might be better to do a cash-out refi because it will be a little better in pricing in terms of rate as an investment cash out refi. Especially now with rates dropping the pricing will be better. Cash out refi will let yo go up to 75% LTV allowing you to get that extra 5% compared to a Heloc. Helocs on investment properties typically can go up to 70% CLTV. Helocs rates are much higher too like in the 10%-13% rate. While investment cash out is more like in the mid to low 7s. I would look into both options to see which is best for your scenario.

@Albert Bui  @Matthew Kwan

[River Sava]

Hey Matt- 

You might want to look into DSCR loans as an option for accessing that equity. They're often a good fit for rental properties since they're based on the property's income rather than your personal income. This could be a great way to pull the equity you're looking for, especially with your rental being nearly paid off. It's definitely worth considering!

Check out this article about DSCRs as well: https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...

[Stacy Raskin]

A DSCR loan would help you access equity if you're looking to get cash out of your investment property. Regarding your question, putting the property in the LLC can be done before or can be done at closing on the new loan. The lender will ask to review all of your LLC documents so you want to make sure that are complete and ready to go. Typically, the request is at least for the organizational documents, operating agreement and the IRS EIN number.

More on DSCR loans: DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to discuss further.