So you own a good rental property and you’re ready to buy your next one. You’ve thought about taking cash out of your current property, so you can be a highly competitive cash buyer for your next property. Great idea, but wait. Have you considered that you might want to improve your existing property first to maximize your war chest for other purchases?
Property condition impacts property value. I know it's obvious, but stay with us. When an appraiser values your property, they are going to select comparable properties and transactions nearby and then make adjustments based on property size, lot size, construction type . . . and condition.
The appraiser will rate it in one of six codes (Source: Bradford Technologies Uniform Appraisal Dataset):
- C1- Best condition, recent construction, structure and dwelling in top-notch condition
- C2- No deferred maintenance, little or no structural deprivation, anything outdated has already been updated
- C3- Well maintained property with normal wear and tear
- C4- Minor deferred maintenance, adequately maintained, minimal repairs required
- C5- Major deferred maintenance, major repairs needed
- C6- Substantial damage, unsafe structural elements
Lenders who offer 30-year financing options are providing money for a long time and are therefore more likely to provide the best terms and conditions, including higher loan-to-values, on properties in good condition.
So before taking out a 30-year cash-out refinance on your property, ask yourself whether you should first spruce it up to get the most out of that refinance loan. You might think to yourself, but I don’t have the cash on hand to make the improvements, that is part of the reason I’m getting a cash-out loan. Yet there is a solution.
Use an unsecured consumer lender, such as LightStream, to finance the improvements. LightStream offers whole-project home improvement financing from $5,000 to $100,000, and flexible terms, so you can make your loan work for you.
Once you secure a LightStream loan and improve your property to better condition, you can then take out a long-term loan with a lender like Visio. With the cash from the long-term Visio loan, you can pay back the unsecured consumer loan and use the rest of your cash towards your next rental home purchase.
For more resources on updating your rental property, check out our Investor Resources.