Refinancing an Investment Property: Bridge, Cash-Out, Exit

Refinancing an investment property usually means one of two things. Either you replace a loan that is coming due, or you pull equity out of a property to use somewhere else. For a residential investor between projects, the tool for both is often a short-term bridge loan. Then, at the end of that loan, comes a second decision: sell the property, or refinance it with a long-term lender.

This guide covers both steps on 1 to 9 unit investment property: refinancing with a bridge or a cash-out bridge, and exiting a short-term loan by sale or long-term refinance.

Rate-and-Term vs Cash-Out

Rate-and-term refinance

The new loan pays off the existing one at about the same balance. The goal is better terms or more time: a maturing loan replaced by a new term, a lender who will not extend replaced by one who will fund.

Cash-out refinance

The new loan is larger than the existing one, and the difference comes to you as cash. The goal is to use equity built through a renovation, a completed build or a rise in value, without selling.

Refinancing with a Bridge Loan

Passy Capital’s bridge loan refinances investment property on these terms:

• Up to 80% LTV on a rate-and-term refinance, 5 points lower on a cash-out
• 12 months, interest-only, 8% to 12%, no prepayment penalty
• $500k to $5M on single family, 2-4 unit, condo, townhome, PUD and small multifamily up to 9 units, fully residential
• Several properties can be refinanced together in one cross-collateralized loan
• Term sheet within 24 hours, closing in about two weeks on a clean file

Foreign nationals refinance on the same terms through their US LLC, with no US credit history required; see cash-out refinance for a foreign national.

When a Bridge Refinance Makes Sense

1. A short-term loan is maturing

A construction, flip or hard money loan comes due before the property is sold or ready for a long-term loan. A bridge replaces it and buys time. Start the conversation well before maturity: a lender asked to close in the last days of a term has fewer options, and so do you.

2. Bridge to sell

A spec home or a renovation is finished and listed, but the construction or renovation loan is ending. A bridge refinance on the completed property keeps it funded while it sells, with no prepayment penalty when it does.

3. Equity for the next acquisition

A property bought or renovated a while ago is worth more than its loan. A cash-out bridge turns part of that equity into the down payment on the next deal. See a cash-out bridge on a single-family house in two weeks.

4. A partner buyout or a free-and-clear property

Investors who bought for cash, or who need to buy out a partner, can put a loan on a property they own outright.

What a Lender Looks At

• Current value, from an appraisal. The LTV limits apply to it.
• The existing loan: payoff amount, maturity date, and any prepayment penalty on it.
• Ownership history: when you bought, what you paid and what you put into the property. On a recent purchase, ask early how the lender treats value created since then.
• The exit from the new loan: a sale or a long-term refinance within the term.
• Experience, liquidity and credit. A foreign national needs no US credit score.

The Cost of a Refinance

Beyond the rate, a refinance carries origination, appraisal, title, legal and recording costs, and any prepayment penalty on the existing loan. In some states, recording a new loan triggers a tax: New York’s mortgage recording tax is the best-known example. Compare the total against what the refinance achieves: time to sell at the right price, or capital for a deal that earns more than the cost of the new loan.

Loan proceeds are generally not taxable income, which is one reason investors refinance rather than sell. How that applies to your entity and your tax residence is a question for your tax adviser.

Exiting the Short-Term Loan

Every bridge, construction, renovation and flip loan ends with one of two exits. Plan which one before you close, not in the last month. More detail in bridge loan exits: sale or refinance.

Exit by sale

The property is sold and the loan is repaid from the proceeds. This is the natural exit for a flip or a spec home. With no prepayment penalty, an early sale costs nothing extra. Build in time for listing, offers and the buyer’s closing.

Exit by refinance with a long-term lender

If you plan to keep the property as a rental, a long-term lender repays the short-term loan. Passy Capital does not offer long-term rental loans, so this refinance is with another lender. What it will typically look at:

• Rents. Leases in place and rental income that covers the new loan payments.
• Value. A new appraisal, with leverage below what a bridge offers. The new loan has to be large enough to repay the short-term one, or you bring the difference.
• Seasoning. Some long-term lenders want a period of ownership or of leasing before they lend on the new value.

Line up the long-term lender while the short-term loan still has months to run, so a slow lease-up or appraisal does not push you against the maturity date. For a build held as a rental, see financing land and a build, then refinancing.

Refinancing with Passy Capital

Submit your deal with the current loan details and the plan for the property. We send a term sheet within 24 hours. Refinances on office, retail, hospitality, mixed-use, buildings of 10 units or more, or above $5M are placed through our capital-partner network, and we say which route applies within 24 hours. To estimate the new payment first, use the bridge loan calculator.