Refinance Your Investment Property In 4 Steps
Instead of waiting until you sell your property to access capital gains, you can take cash out from these gains when you refinance your property. Cash-out refinancing is a good way to reduce your overall investment in real estate purchases.
Want to know how refinancing works? Follow along with our step-by-step guide!
Renovate your property
To get the most from refinancing, you want to strategically bump up the appraised value of your property. Value-added upgrades are the most reliable way to do so, such as:
- Improving the condition of your property,
- Increasing the number bedrooms or bathrooms,
- Increasing the number of rental units in your property.
When you buy your property with us, we provide you with a detailed scope of work, cost estimates, and connect you with our network of reliable contractors, so you can get the most out of your value-added work.
Lease out your property
Just like a mortgage, lenders look at two debt service ratios in order to determine how much refinancing you qualify for – the lower, the better. If you want to increase your refinancing amount, you’ll need to compensate it with higher income.
Because rent adds to your annual income, it is in your best interest to maximize your rent in order to get the highest refinanced amount possible.
For existing tenants, you should always make annual rent increases at the rent increase guideline rate, currently at 2.2% for 2020 in Ontario.
If you’re starting a new lease, check with our leasing team to give you expert insights on market rents in your area and to help you secure reliable tenants who pay rent on time.
Refinancing your property
Now that you brought the market value of your property to the highest and best use generating the maximum rents possible, it’s time to go back to the banks to ask for refinancing at the property’s maximum valuation. Your initial mortgage was based on the purchase price of your home. With new renovations, the appraised value of your property may have gone up significantly.
The big benefit of refinancing your property is the ability to access additional financing in the form of cash from your property’s appreciation without selling the property. Since there is no sale, you don’t have to pay for capital gains tax or sales fees.
Qualifying For Refinancing
Maximizing Your Property’s Appraisal
Refinancing is based on the new appraised value of your property. Even though an appraisal is done by a professional, it’s dependant on a visual inspection and is subjective. Here’s tips to help you maximize your property’s appraisal:
- Upgrades: Provide the appraiser with an itemized list with renovation dates, description, materials, and costs.
- Comparable properties: Provide a list of similarly properties in the area with the latest sales prices.
- Get multiple opinions: If you think your property is worth more, you can try to go to another bank or appraiser
Paying Refinancing Fees
The actual process of refinancing involves paying off your old mortgage and then creating a new mortgage. Depending on the type of mortgage you have, the penalties for early repayment may vary. For a fixed rate mortgage, this penalty is typically set at the higher of three months’ interest or a calculation called the interest rate differential. With the new mortgage, you may also be responsible for the appraisal fee.
Similar to getting a new mortgage, you need to consult a lawyer to review revised terms, register the new mortgage, conduct a new title search, and facilitate the entire financial transaction.
Getting Your Refinanced Funds
Once you get your refinancing approved, it’s time to get access to your refinanced funds. The cash from refinancing will be the net amount after refinancing fees.
In this example, the property was purchased at $830,000. With a 20% downpayment, your initial mortgage was $664,000. After renovations, the appraised value goes up to $1,081,500 and you qualify for additional financing of $201,020. After deducting refinancing fees, you can take $195,200 out as cash.