Refinancing a rental property can be an incredibly beneficial step for you to take as a landlord, but there are a lot of different factors involved that could determine whether it is the right move. Because there is an element of risk involved, you want to go into the process knowing what you’re looking to get out of it and why so that you don’t end up making things worse for yourself.
For this reason, let’s look at different indicators that show that it is the right time to refinance and what you should hope to get out of these scenarios.
You Want Lower Interest Rates
Interest rates can be a burden, especially if they are allowed to build over a long period of time and make your debt much worse. It is understandable to want to lower these rates and reduce the amount you end up paying for your mortgage overall.
One way to secure lower interest rates is to shorten the term of your loan. If you cut the length of your loan term in half, this is generally less risky for the lender and can result in lower interest rates. Keep in mind that this means that you will pay more each month. By switching from an adjustable-rate to a fixed-rate mortgage, your low interest rates won’t fluctuate and you will be able to maintain those rates going forward. Shortening your loan term may also be a good idea if you are looking to get out of debt faster, which will allow you to invest in other assets going forward.
You Want More Discretionary Funding Each Month
For a number of reasons, it can be beneficial to have a little more money to spend month-to-month on your rental business. There are a lot of elements to your job that could benefit from financial attention, and you might even be interested in making investments that increase the value of your properties to help you with future refinancing efforts. Changing the distribution of monthly funds between your investment property and loans is a common long-term tactic that can pay off down the road.
If this is your goal, it may be a good idea to lengthen your loan term. You will be paying less each month over a longer period of time, which means that less of your monthly budget will go toward your mortgage. Note that because longer-term mortgages are riskier, you run the risk of securing higher interest rates and ultimately paying more overall.
Another option is to do what is called cash-out refinancing, wherein your new loan is an increase of your current balance but you are able to collect the difference as a payout. This can be risky, so it is advisable to have a solid plan with how you intend to spend that money and how it might be used to increase the value of your business and your properties to help you in the future.
You Want to Expand Your Real Estate Portfolio
If you are looking to expand your rental business, this can be achieved through what is called the BRRRR method real estate. BRRRR stands for buy, rehab, rent, refinance, and repeat.
The method suggests buying properties that are below market value. Once you complete the next steps of refurbishing and refinancing, the increased value of the property should help you make more money back than you initially invested into the low-value property. This puts you in a position where you can then repeat the process by buying another property below market value. After a while, you will have added a number of high-value properties to your real estate portfolio and your business will have expanded in a respectable way.
The desired outcome of refinancing depends on the circumstances of your real estate business and what your needs might be going forward. The important thing to keep in mind is that you should go into refinancing with a clear idea of what you hope to get out of it. Refinancing is an investment, but intentional decision-making is more likely to set you up for success.
If you are looking to refinance, carefully consider your circumstances and your needs and see which method is best for you.