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Home · Property Management · Financing : Refinancing Rental Property In Today`s Market

by Ilyce Glink, Inman News

Piggy bank photoQ: I wish to refinance my rental property (a townhouse). I have been advised that doing a cash-out refinance isn’t possible in today’s climate, but if I want to take cash out of the transaction, I have to refinance using an equity loan.

I asked if federal or state law required me to refinance this way, but I’ve received no definitive explanation. Can I refinance to take money using an equity loan?

A: The current credit markets have made it difficult to finance rental property — even if you have a large amount of equity in the deal. Doing a cash-out refinance may also be very difficult at the moment because investors have been burned and aren’t looking to buy these sorts of loans.
You probably fall into a classification of commercial and investment loans that are currently hurting more than other loans. Your property is classified as residential, but its use to you is as an investment property. In some markets the residential market is doing quite badly, and residential lenders are looking closely at each deal and making it harder to apply for residential loans.

You don’t qualify for a residential loan, and commercial lenders are limiting their investments in residential properties. Small investors like you are finding it hard to obtain financing for these types of deals. In a sense, what you are hearing is that you should be happy to have the financing you currently have and that new lenders are not looking to give you more money. They’re willing to extend additional credit to you as an equity loan on terms that are probably less favorable than your current first mortgage loan.

In any event, I don’t know of a conventional lender that would allow you to borrow more than 70 percent or 75 percent of the equity in the property at the moment. So if you’re looking to cash out 90 percent of the equity, the numbers might not work out.
Where might you go to get money? If you’re a real estate investor with multiple properties, you might have better luck with a bank that might be willing to look at your portfolio of properties and refinance all of them.

You might want to try some local savings and loans or community banks and see if they have any interest in lending you money. Some local banks are becoming more active in the real estate market as larger banks pull back. But that bank must be willing to give you the loan and will probably have to keep the loan on its books. It won’t be able to sell the loan on the secondary market as your townhome is rented and does not qualify as an owner-occupied residence or even as a second home.

As the real estate market improves, it may be easier to refinance your property. To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.

What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.

Copyright 2008 Ilyce R. Glink

Click here to see Ilyce Glink and Samuel Tamkin article, Better Return on Investment: Stocks or Real Estate?

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  • I don’t think Ilyce R. Glink fully answered the question. I think most of the answer focused on how difficult it would be to refinance.

    The question I think the writer really was looking for an answer to is “what are the tax implications?” I know everyone’s situation is different but the question is whether taking equity out of a rental property is a taxable event. The IRS certainly doesn’t want investors taking cash out during a 1031 exchange but are we allowed to get cash out of a rental property through a refinance?

  • I can’t speak to the effect of the tax implication but in as far as the refinancing issue is concerned your best bet would be to approach a mortgage broker. Mortgage brokers offer a variety of solutions which include major financial institutions but more importantly in your case hard money & alternative lenders. While their rates might not be as competetive as the major banks there are lenders all across North America who are looking for solid investments.

    Where credit & federal legislation may be hampering you there are always alternative, creative solutions to financing a property that can help you get where you want to be.

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