Investors in real estate rental property take notice; If you’ve been wondering if it is worth it to refinance rental property, the answer today is a resounding “Yes!” There is one main reason for this. Investment property mortgage rates have been falling along with all mortgage rates over the past 15 months. Inquire with your mortgage lender about rental property mortgage rates and you should find that the mortgage rates being offered have fallen by more than a point since October of 2018. That can equate to a 20% lower interest rate compared to rates offered about a year ago. A lower interest rate can dramatically impact your monthly payment and how much you pay in interest over the loan term.
Obtaining a new loan now would be great if you had a rental property in which to invest already lined up. However, you may not be in that position today. If you already have an existing investment loan, one way to cash in on these low rates is to refinance your investment property. Depending upon your equity, you can use the cash taken from the refinancing of the rental property as a cash payment or a down payment on your next investment property. You can do needed renovations, or you can refinance rental property to lower your monthly payment or reduce the term of your loan.
Let’s look closely at some of these reasons and others for why you should consider refinancing rental property in early 2020.
Why You Should Refinance Rental Property
Reason 1 – A Great Economy
When things are good, like they are today in the U.S. economy, lenders are looking for customers. They want to provide loans to qualified borrowers who own investment property like you. With rates low and the overall economy so strong, your chances of being approved are high. Should the economy slip into recession, rates may climb and loan and borrower requirements may tighten. The time to establish a cash reserve is now. Refinance rental property before you need to, not after things head south.
Reason 2 – To Buy Another Property
One of the top reasons to refinance rental property is to buy another property. If you have maintained your investment property in a stable or desirable neighborhood, the chances are very good that your equity has grown significantly. If you are in this position, you can do a cash-out refinance of your rental property. This will provide you with a cash reserve you can then use for buying a second rental property.
Mashvisor is a unique tool that will help you find that second rental property. Click here to check out our property finder tool.
Reason 3 – BRRRR Strategy
In the rental property investment business, one popular model is called the BRRRR strategy. This stands for Buy-Rehab-Rent-Refinance-Repeat. It perfectly describes my personal rental property business. I have purchased distressed properties, renovated them with borrowed money, and built equity. During this time, the unit was rented at the new higher rental rate justified by the renovation on that property. I have then refinanced the loan taken the now higher-value property, and taken cash out. I then reinvested that money into another purchase of a property in need of serious renovation. This process is repeated over and over again. It is so popular that there are many popular renovation reality TV series based on the general concept.
This is not rocket science and it is a workable model for real estate investing that relies primarily on borrowed money. One key to this strategy is to know when to refinance rental property and when to buy. The two are not necessarily done at the same time. In fact, it is better to be buying and renovating when the real estate market is down. One then finishes up the projects and rents the “fully refurbished” units at the higher price when the market is up and then refinances. Rent roll is an important part of the loan application process. The higher your rents, the stronger your borrowing power.
Reason 4 – Reduce Your Term
Perhaps you are happy with your real estate portfolio. Maybe you are not ready to buy and renovate more properties at this moment. Refinancing a rental property makes sense for another reason. To save you money. When rates are meaningfully lower, you can refinance and not take out money. You can just restructure your loan to pay less interest and increase your gross and net profits. If you keep the term the same or similar, you will pay less monthly. If you reduce the term, you will pay less interest over the life of the loan. Why let a historically-low interest rate pass you by?
Reason 5 – Move Away From Personal Loans
Many investors in our business break into it with investment loans that we ourselves are backing. If you obtain an owner-occupied low-interest loan, you are personally responsible for that loan. As an investment property matures, most investors opt to step up the professionalism a bit and create a company under which all of the rental properties are held.
The most common way is via a limited liability partnership or LLC. Some investors set up multiple LLCs for different investment properties depending on where they are located and to shield the others from liability and bankruptcy. An LLC has many advantages. If you have a loan now that you personally back, why not consider refinancing and switching to a non-owner-occupied business loan?
Although investment property mortgage rates are slightly higher than a personal mortgage, with interest rates having dropped so much, you may still be able to get a better rate plus the advantages of having your loan be held under your LLC.
As you can see, there are many arguments about why it is worth it to refinance rental property loans. It can help to grow your business. It can help you to do needed maintenance, repair, and upgrades. A refinanced loan can save you money in the immediate term, or over time, or both. A loan under your LLC may shield you against personal liability and protect your personal assets in the event your real estate investment business has difficulty later.
How to Refinance a Rental Property
This is the easy part. To begin the process of refinancing your rental property, make a phone call. Start with the lender you already work with. Be sure you know the terms of your existing loan. Many have restrictions on when and how often you can refinance. Be sure you can. Next, ask your mortgage lender what options they themselves offer. Relationships in rental property investing matter. If you can continue to work with your lender, that is a bonus. Once you know your options, you can then ask other lenders for their options.
If you have not yet formed an LLC, this is also the time to speak to a local, knowledgeable tax attorney who can help you understand how to form one. If you will be refinancing, it is always best to form the LLC first. Here’s a tip: You do not always have to create your LLC in the state in which you reside. Bordering states may have better advantages; your attorney will (should) know the options.
Refinancing presents you with a great opportunity. If you opt to refinance rental property, Mashvisor has many great tools you can use to help with the next step – expanding your business.