Refinancing to Acquire Rental Properties

Cash is king during a recession, and those who have money to buy today's depressed income-producing properties are laughing all the way to the bank. To get investment capital, many are turning to refinancing strategies.

Those who exercise financial discipline may be wise to buy rental properties while interest rates, and the cost of homes, are both attractively priced. One way to pay for them is through the refinance of a previously-owned property. By refinancing a property that still has plenty of unspent equity, it's possible to leverage one real estate asset to acquire another. A clever businessman could possibly refinance his way into an entire portfolio of properties this way.

Advantages of rental properties

Rentals offer several strategic advantages, especially this year.

• During the last real estate run-up, developers and builders focused on homes, not apartments. They also converted rental properties, like condos and duplexes, back into saleable single-family homes. The shift allowed them to capture rising sales prices, but it also effectively diminished the number of rental properties and created a much smaller supply.
• Even with notably fewer available rentals, millions of homeowners who sold homes to avoid foreclosure, plus those who lost homes to foreclosure repossession, are back in the market for leased homes.
• Demand is skyrocketing, but supplies are tightening. This means that landlords can charge higher monthly rents and be more selective about choosing tenants.
• Renting allows an owner to collect rent to cover mortgage payments, taxes, insurance, and other obligations. As long as rents are going up and vacancies are going down, investors can buy property and either break even or enjoy positive cash flow. Rental income basically buys the property without adversely impacting the investor's finances.
• Lenders are hungry for mortgage and loan refinancing business because they're turning down larger numbers of applicants who are unable to meet newer and more stringent underwriting guidelines. Approach a lender when you enjoy good credit, solid equity, and a plan to make more money through rental real estate, and it's possible to get preferential treatment.
• Rates are historically low, but the Fed is starting to worry about the weak dollar and rampant inflation. As a result, rate hikes will likely be here soon. Lock in cheap rates now, buy depressed properties from foreclosure, and watch your investment margins widen over the coming months and years.

Protecting yourself

Many of today's would-be renters have serious credit problems. Run credit and background checks on potential renters before signing a lease, and escrow adequate security deposits to cover any unexpected property damage or delinquent payments.

One way to make landlording less stressful is to hire a professional property management company to oversee all aspects of your rental business. Deduct the cost as a business expense to offset taxes paid on any rental income you make. You can also take qualifying interest payment deductions on your refinanced mortgages.