Landlords look into refinancing a rental property in order to get a better mortgage than the one that they’re currently paying. The definition of ‘better’ varies depending on the particular needs of your rental business, but if you approach refinancing in a careful and considered way, you have a much higher likelihood of meeting those needs.
Refinancing is an investment and may involve some initial risks, but seeing the process through can have a number of advantages that make it worthwhile. Here are five ways that refinancing can address a variety of your rental business needs.
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Reduce Your Interest Rates and Keep Them Low
A common goal for landlords who refinance is to get a lower interest rate. With adjustable-rate mortgages, your interest rates have the potential to fluctuate, and that can mean that you are paying more over time. If you are able to add equity and get a lower interest rate when you refinance, switching to a fixed-rate mortgage means that your low interest rates will stay low, and you won’t have to risk the influence of a changing market.
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Reduce Your Monthly Payments
There are plenty of good reasons to adjust your mortgage so that it decreases your monthly payments. Having more money every month that you can use to invest in other aspects of your rental business can help you add value to your property.
A key way to accomplish this is to increase the term of your mortgage. If you double the term, you will have to pay less every month, giving you more flexibility with how you spend your monthly budget.
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Reduce Your Mortgage Term
On the other hand, there are also benefits to shortening the term of your mortgage. For instance, if you cut the term of your mortgage in half, that means that you will ultimately spend half the time in debt, freeing you up in the future to invest in other things. The state of your investment property and loans may determine whether you want to lengthen or shorten your mortgage term.
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Add Value to Existing Properties
As mentioned above, lower regular payments mean that you have more discretionary money to spend month-to-month on your business. You can use this money that you have to make improvements to your existing property, refurbishing and expanding features in order to increase the property’s value. If you refinance again in the future, the value that you’ve added to your property will come in handy.
Cash-out refinancing is another way to get more money for investments and involves receiving a higher mortgage but with the ability to withdraw the equity as funds that you can use to add value to your properties. This is a gamble, but it allows you the flexibility to make necessary investments.
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Expand Your Real Estate Portfolio
The BRRRR method real estate experts developed takes this idea of adding value to your property and turns it into a repeating cycle that can allow you to potentially add more properties to your real estate portfolio. BRRRR stands for buy, rehab, rent, refinance, and repeat.
The method encourages buying properties that are below-market value and refurbishing and renting them in order to raise their value. Subsequent refinancing with what should be a higher appraisal value should help you make back the money on your investment. The last step—repeat—encourages you to go through the process with more below-market properties, setting you up to diversify and strengthen your business while expanding your number of investments.
Conclusion
What you get out of refinancing is contingent both on your particular needs and also how vigilant and proactive you are in navigating the process to ensure that it pays off. Strategies like BRRRR may require you to take initial risks or loss, so it is important to see it through in order to take advantage of the benefits.
As we have seen, the benefits are plentiful and significant. As a landlord, you invest a lot of time and effort into your rental business, and the advantages of refinancing and the ways in which they can help sustain and grow your business are worth the investment.
