The ownership of rental property can be both a rewarding and challenging venture. On the surface, it only may appear to involve little more than purchase, upkeep, and leasing of a home. But, as many landlords and investors can attest, it involves plenty of financial and strategic know-how that surpasses the simple collection of monthly rent checks. It is imperative that every owner consciously consider all available avenues to meet business and financial goals.

One approach used by rental owners to reduce their debt and increase rental property income is the refinancing of the property. But, before the consideration of this loan process begins, owners should consider refinancing factors like property preservation, lease longevity, interest rates, and creative lending.

Property Preservation

Even though a lease agreement may state that the occupant is responsible for small repairs or yard maintenance, this responsibility ultimately falls upon the owner. For financing purposes, ensure no significant maintenance issues exist that may deter the lender from loan consideration. A severely distressed property can affect the creditor’s decision to offer financing and can also impact the insurability of the home. Be sure that all major repairs and remodels are corrected before the loan application. If you’re unsure of your property’s condition, make sure to have it inspected before you move forward. A thorough inspection can make you aware of issues with your property that you might not have caught otherwise.

Second Home vs. Investment Property

Knowing what your property qualifies as—a second home or an investment property—is essential to the refinancing process. If your rental property generates enough income to meet mortgage payments, it will probably be considered an investment property. If your income, not including rental income, is enough to cover the mortgage payments on the property and the property is a reasonable distance (this is typically considered fifty miles or more) from your primary residence, it might qualify to be refinanced as a second home. This can be beneficial, as it is harder and more costly to finance an investment property. The reason for this is because, with an investment property, the income it generates is considered when you qualify for the loan and its potential loss is considered a risk factor.

Equity

Equity is often a huge obstacle for property owners trying to secure refinancing for a rental home. This is due to the perception that an owner occupying a property is unlikely to default on their mortgage than if the property was occupied by renters. Owners who don’t have a significant investment in their rental property may want to reconsider their reasons for wanting to refinance. If a second mortgage has been taken out on the rental property, this may make refinancing more difficult, as the second lender might not be willing to work with a plan to refinance.

Interest Rate

Through the eyes of the lender, real estate investment is considered to be riskier than investment in an owner- occupied home. This is usually because owners tend to take more care with the property they live in than renting residents do. Incidences like damages or loss of income due to the tenant’s failure to pay rent can place a financial strain on the property owner and his or her ability to make timely payments to the mortgage company. Therefore, bear in mind that the percent may automatically be higher on leased homes to absorb some of the creditor’s risk.

Lender Preferences

As stated before, lenders consider rental property loans to be riskier than loans for owner-occupied properties, so they will evaluate your application differently. Your credit score will need to be high and your debt-to-income ratio will need to be stable in order to qualify for a refinance of your property. Lenders will typically allow only applicants with an LTV lower than 75% refinance an investment property, which is lower than the usual requirements for owner-occupied property refinances.

Lease Longevity

Lease longevity is a great avenue that shows the lender a positive cash flow. The ability to produce a current lease agreement and a monthly income statement looks positive towards decision making. Landlords may be required to produce additional personal income to cover for tenants that either pay intermittently or have newly occupied the dwelling.

Creative Lending

Investors who do not qualify for traditional financing may consider hard money lending. The hard money lender provides short-term financing. Interest rates are normally higher with brief financing periods. This gives landlords an opportunity to bypass stringent lending guidelines for a temporary loan while qualifying for traditional financing.

The decision to refinance a rental home is not one to be made lightly. Many seemingly minute factors can impact a lender’s decision to secure a loan. Use these tips as a baseline to assist in refinancing a rental home property and to make the best decision to meet future financial goals.