You Want to Re-Finance to Access Capital? Do Your Math First

Posted on 15. Jun, 2012 by in News

There aren’t many of us who have all the money we need to buy all the properties we want. So what can you do about it?

One option is to look at the equity you already have built up in your current properties that you own. This is the re-finance strategy where you move the property back up to 80% financed and pay out the old mortgage or maybe do this on renewal time. BUT…..this can have a negative impact on 2 things – Cash flow and Debt Coverage Ratio. A change in the cash flow of the re-financed property is OK so long as the new purchase more than makes up for that lost cash flow. A reduction in the Debt Coverage Ratio can make your overall portfolio worse and then make it more difficult to get financing on that new property!

This is where you need to do some calculations to make sure that you are in the same position or better once the re-finance is completed. There are too many re-finances that have happened to investors where, after the event the new purchase can’t take place as the Debt Coverage Ratio is now out of whack! Banks and lenders all want to make sure that your DCR is 1.1 or above so every property you look at should meet that and then some. Give yourself some room and aim for 1.2 and above on all deals that you look at. This will make sure that each time you add a property into your portfolio it is increasing the overall level to 1.2 or above. Remember, he who has the gold makes all the rules and, in the case of investors – this means the lenders.

Be sophisticated and do your calculations before you decide that this is the way you want to access the capital to get that next killer deal.

To Your Investing Success

Rich

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