Key Takeaways
- Refinancing investment properties provides access to equity, improves cash flow, and enables portfolio growth through strategies like cash-out, rate-and-term, and portfolio refinancing.
- Investment properties require stricter qualifications than primary residences, including at least 25% equity, a 620+ credit score, and under 45% debt-to-income ratio.
- Private lenders offer faster closings and more flexible underwriting focused on property cash flow, making them ideal for investors managing multiple properties or time-sensitive deals.
- Avoid common mistakes like overleveraging, underestimating closing costs, and poor market timing to maximize refinancing returns.
Refinancing an investment property can allow investors to boost long-term returns in their portfolio. This is because refinancing can have a material impact on profitability. Refinancing can lead to lower payment amounts or more favorable loan terms as well as the ability to tap into equity.
Seasoned investors know that saving money in the short term is just a small part of refinancing. It’s a valuable step that can allow you to optimize cash flow in the long run.
For instance, a rate and term refinance can lower your payments and improve cash flow across multiple properties. And, a cash-out refinance can give you access to funding for improvements, repairs, or the acquisition of other real estate.
A key factor to understand is how refinancing impacts your investment strategy. With the right approach, refinancing can be more than just a single transaction. It can become a strategic tool for scalable growth.
Why Refinance an Investment Property?
Refinancing is a strategy used by experienced investors to improve profitability, cash flow, liquidity, and leverage. As a result, investors may end up in a stronger position to quickly expand portfolios and acquire additional properties.
- Lower interest rates: Lower payments and interest rates typically saves money, which you can put toward maintenance funds and other investments.
- Access to equity: With equity from one investment, you can make down payments on other real estate, conduct repairs or improvements, or eliminate high-interest debt.
- Better loan terms: Switching between loan structures can give you benefits from each, such as predictable payments for fixed-rate loans and lower interest rates for adjustable loans.
- Manageable debt types: You can replace or convert short-term bridge debt into permanent long-term debt for greater financial stability due to more stable payments.
Ultimately, refinancing an investment property is more than just saving on costs. It allows for the conversion of debt to a more favorable structure to support long-term growth.
Smart Refinance Strategies for Experienced Investors
Experienced investors use refinancing as a recurring strategy, rather than a one-time transaction. Several refinancing strategies exist, each with its own set of pros and cons related to cost, return potential, and flexibility.
The most suitable refinancing strategies will depend on your goals: whether it’s accessing equity, improving cash flow, or expanding an existing portfolio.
Cash-Out Refinance
A cash-out refinance allows investors to access a property’s equity and turn it into capital. Common uses include the acquisition of other rental properties, funding of repairs and renovations, or paying off expensive debt.
This is popular with strategies like a BRRRR method, where properties are bought, refurbished (or rehabbed), rented, and refinanced to free up capital for the next deal.
Rate-and-Term Refinance
A rate-and-term refinance enables investors to change the interest rate and/or loan term. By securing a lower interest rate, you can quickly improve a property’s cash flow.
A rate-and-term refinance also allows investors to adjust the length, or amortization period, of the loan and switch between a fixed-rate or adjustable-rate loan.
Portfolio Refinance
A portfolio refinance combines payments on multiple properties into a single loan. This can be beneficial for investors who make separate payments on each property they own or for those considering build-to-rent markets.
Combining payments for properties into a single loan can reduce the time needed to manage finances and simplify servicing issues.
In many cases, it can result in savings due to more favorable investment property refinance rates. This is because it allows investors to leverage the strength of their entire portfolio to qualify for competitive loan rates and terms.
Key Considerations Before Refinancing
Investors should consider whether it’s the right time to complete a refinance. Interest rate trends, property values, and rental demand are all factors that can impact its effectiveness.
For instance, the property’s current market value can impact how much equity you may be able to access. And, loan costs such as origination fees and third-party costs can cut into expected profits.
Investors should also consider the exit strategy they’ll use to identify the most suitable refinancing strategy. Some strategies include holding a property for long-term rental income, upgrading the home for a sale, or reinvesting funds via a 1031 exchange.
Qualifying to Refinance an Investment Property
Issuing loans on investment properties represents a higher risk to lenders. For this reason, eligibility criteria are generally far stricter compared to owner-occupied primary residences.
Although lenders have varying standards, the following are common variables investors will be evaluated on:
- Equity: For conventional cash-out refinances, many lenders require at least 25% equity to be eligible for financing. Investors with more equity can often qualify for more favorable loan terms.
- Credit score: A score of 620 and above will qualify you for most loans. But, higher scores may allow you to save on fees.
- Debt-to-income ratio: In general, a debt-to-income ratio no greater than 45% is needed. This is measured by dividing your monthly debts by your gross monthly qualifying income.
Steps to Refinance Your Investment Property
Refinancing can be a complex process, but it can be streamlined if you’re prepared and select the right lender. As a private lender, LendingOne is an excellent choice for streamlined refinances because we understand the challenges faced by investors. Our DSCR rental loan options provide high leverage for both rate/term refinances and cash-out refinances.
Choose a Lender to Work With
It’s highly recommended to select a lender well-versed in investment property loans. Traditional lenders may be able to offer more competitive rates and fees. But, they typically lack flexibility in eligibility criteria and have longer approval and funding timelines.
Private lenders, like LendingOne, can often provide faster closings and more flexible underwriting. They also tend to be able to provide tailored repayment terms, loan structures, and a higher level of customer service.
Investors managing multiple properties or working with time-sensitive deals can get a strategic advantage by partnering with a private lender. For example, LendingOne focuses on customized loans, efficient loan approvals, and personalized service.
Preparing and Submitting Your Application
Even before applying, collecting commonly required documents can streamline the loan approval process. Tax returns, bank statements, financial statements, and lease agreements are some of the documents lenders typically require.
To reduce the likelihood of delays, private lenders can guide investors through this process. This can speed up processes due to their familiarity with the nuances of investment property refinancing.
Locking in Your Rate
Interest rates can fluctuate daily. Locking in a rate guarantees you’ll receive that rate. Although, this depends on your application’s approval and whether you comply with the lender’s requests for documentation in a timely manner.
Lenders have varying policies regarding how rate locks are handled. Some allow rates to be locked in only upon full approval of your loan application.
Others may offer a lower rate for a fee, should rates lower significantly during the course of your application process. Private lenders, in general, offer more flexibility in terms of rate lock.
LendingOne offers a complimentary free 45-day rate lock that allows investors to lock in rates now to protect against market changes later.
Undergoing Underwriting
Underwriting is the process by which lenders evaluate your entire application to ensure adherence to lending guidelines.
In this process, an investor’s finances, credit, and the property’s value and condition are all reviewed. This is so the lender can determine if the loan can be approved and if there are specific loan terms available.
Private lenders often place a larger emphasis on a property’s cash flow, rather than personal finances and income. This can make it easier to get approved compared to traditional lenders.
Closing the Loan
Once your loan has been approved, you’ll be able to schedule an appointment to sign the final paperwork. This often involves a notary public to verify your identity, so be sure to pay attention to instructions on acceptable forms of identification.
Once signed, the paperwork will be reviewed once more by your lender, at which point funds will be disbursed. Private lenders often maintain excellent communication during each of these stages to ensure a smooth close.
How to Maximize Returns When You Refinance Investment Property
Timing, loan terms, and the reinvestment strategy are variables investors should consider in maximizing returns when refinancing an investment property.
Timing refinances when rates are low or after a property has appreciated can result in greater cash flow and access to funding.
Adjusting loan terms can also help reduce payments if the amortization period is extended. Or, it can reduce the total amount of interest expenses paid if it’s shortened.
Strategies like a cash-out refinance can provide access to equity that can be used to fund repairs, improvements, or the acquisition of more properties.
Common Mistakes to Avoid When Refinancing
Refinancing alone can be risky. Investors need to put a lot of effort into investigating market shifts and rate changes. Therefore, when refinancing, you’ll want to avoid making the following mistakes:
- Overleveraging involves taking on too much debt at the cost of reducing the amount of available cash. This can be dangerous if markets shift.
- Underestimating closing costs can reduce expected profits or cash flow. It’s important to consider all fees, including origination costs, appraisal expenses, prepayment penalties, and other third-party vendor charges.
- Mistiming the market, like refinancing before rates rise or property values fall, can eliminate or reduce expected benefits from refinancing.
For more insight on market timing and how to identify good deals, explore our discussion on real estate market opportunity.
Working With Private Lenders vs. Traditional Banks
In refinancing an investment property, it’s critical to select the right lender.
Traditional lenders may offer more competitive rates and fees. But, they typically come at the cost of slower funding speeds, more extensive documentation requirements, and less flexible underwriting standards.
Private lenders are usually the opposite. They may not have the best rates, but they can offer faster funding speeds and more flexible underwriting requirements, alongside customized loan terms.
For investors managing multiple properties, benefits of private lenders often outweigh the downsides of slightly higher rates and fees.
As a private lender, LendingOne understands the needs of real estate investors. We offer streamlined loan processes, fast funding, and the ability to tailor approvals and terms to align with portfolio goals.
Final Thoughts
Refinancing investment properties can be a strategic move. It can improve your cash flow, provide access to more capital, and offer a greater ability to grow your portfolio.
With the right lending partner, investors can use refinancing as a financial tool to ensure scalable long-term growth.
LendingOne has a team of advisors who specialize in financing solutions for real estate investors. Our advisors can offer guidance in offering customized solutions suitable for your needs and goals.
Ready to see how LendingOne can help you meet your financial goals? Speak to a loan advisor today.
