Today I want to talk about passive income and why banks like giving money over to you when they see that your rental property is performing and is producing cash. So you probably think about getting a mortgage on a rental property. You probably think about, hey, I don’t own it yet. I’m going to go to the bank, they’re going to give me money, and I’m going to buy it. Yeah, that’s one way to do it. But the way that the banks really like is when you’ve already bought it, maybe using your own cash, so you have some skin in the game. You own that rental property. Now you do what’s known as cash out refinance. So what you’ll do is you’ll go to the bank and say, hey, folks.
I’ve got this property, and guess what, I’ve already renovated it using my own cash. And I’ve got a tenant in the property with a year long lease or a two year lease or a five year lease. And it’s producing 800, 900 dollars a month in positive cash flow. And that banker is going to look at you and say ding, ding, ding. Whoa, yes, I’ll go for it right now. So there’s a couple of things at play here in why they like doing it this way. Number one, it’s the cash flow, right? It’s an asset that they see is performing already. It’s not the promise of it performing, as in scenario number one before you buy it. No, it is performing. They can see the lease. They’re going to want to see the lease agreement. And they’re going to want to see your bank statements to see that this tenant pays on time. So that’s number one. Number two, they like to know that you have some skin in the game, that you’ve actually already purchased the property. That shows them good faith that you believe in this property. And therefore, they’re likely to believe in it too.
So those are two big things going for you. The other great benefit of it is that they’re really going to look at the asset itself, the property itself, and they’re going to care a little bit less about you as the investor, as you the person that’s paying it back. Why? Well, number one– the tenant is paying them back in a way, if you think about it. The cash flow from that tenant is going to cover the mortgage. And I’ve talked to a number of bankers that said that they would take that scenario any day of the week if they could look on paper and see that the mortgage they’re about to give you is going to cost you $350 a month– that’s what you’re going to have to pay the bank– but you’re bringing in $900 a month from the tenant. That’s a no brainer. That is a no brainer to a bank. And right now, your local banks and frankly, the large national banks are scrambling because interest rates are so low. They want business, but under the federal rules for what they can lend on the front end before you own the property, it’s very, very stringent.
You can thank the Dodd-Frank law, you can think all sorts of moves in Congress given the 2008 crash that make it difficult for you to acquire the property using a bank. But once you do own it and it’s cash flowing, now things loosen up a little bit in the banking quarters. And they want that business. They want you to put your money in their bank. And they want to be able to make some money off of your property. It’s a no brainer. So that, my friends, is why banks love doing cash out refinances on properties. And hey, you could even go ninja level and take a bunch of your rental properties, maybe bundle it together. Maybe you’ve got five or 10 of them. Many of our investors do that.
They’ll buy five properties with us. They’ll do a cash out refinance, get the money right back out, and buy five more. And then use that money to pay off the first loan and they snowball it. And that’s how, my friends, the rich get richer using this strategy. It really is an amazing strategy. And guess what? The banks like it.
