Curve

How and when to refinance a rental or investment property

Erik J. Martin
The Mortgage Reports contributor

“There may never be a better time to refinance a rental or investment property”

Do you own a rental or investment property? Now may be a great time to refinance, lower your payments, and increase cash flow.

Investment property mortgage rates are near historic lows. You might be surprised at the rate you can get, even if you don’t live in the home.

But refinancing doesn’t make sense for everyone. You should make sure your income and the property are suitable to receive the lowest rates possible.

That means getting your paperwork organized, improving your credit score, and getting your multiple houses in order. We share tips for scoring the best refinance rate here.

Shop around carefully for refi opportunities. And compare rates and terms. If the math is favorable, think about locking in soon to guarantee your low rate.

Find and lock a low rate for your investment property (Nov 22nd, 2019)

Good reasons to refinance your investment property

There are two excellent reasons to refinance a rental or investment property:

  • Lower your mortgage rate or pay off your loan faster
  • Use a cash-out refinance to purchase new investment properties or upgrade your current one

Seth Feinman, vice president of Silver Fin Capital Group LLC, says refinancing can make sense for a lot of rental or investment property owners.

“You likely want to keep your carrying costs as low as possible on an investment property. This is due to the risky nature of potentially not having a tenant at times,” he says.

“So if you have the chance to lower your interest rate or lower your payments, you may want to jump on that opportunity.”

Besides simply lowering your mortgage rate, there are other reasons to refinance a rental or investment property.

For instance, you can pursue a cash-out refi. That involves tapping into your equity and pulling money out of the property that you can pocket at closing.

“It can be a great time right now to take money out so that you can buy another investment property. That beats taking money out of the stock market or other financial investments. You can use your increased equity to purchase further investment properties,” adds Feinman.

Or, you could use that cash-out money to upgrade your existing rental or investment property. This could raise the value of the property and increase your returns through equity or higher rent.

Another option: If you have co-investors on your property, you could use cashed-out funds to repay them.

Andrew Rosenberg is a partner in the law firm of Cassin & Cassin LLP. He explains that refinancing can improve your cash flow, too.

“When interest rates are low, refinancing a property without increasing the amount of debt you owe is smart. It will generally have a positive effect on cash flow because debt service costs will decrease,” says Rosenberg.

Capture a historic low interest rate. Start here (Nov 22nd, 2019)

Finding the right time to refinance

Realtor and attorney Bruce Ailion says this is a fantastic time to refinance.

“That’s because interest rates are at historic lows. There may never be a better time to refinance an investment property or rental property,” he says.

“Interest rates are at historic lows. There may never be a better time to refinance an investment property or rental property.” –Bruce Ailion, Realtor and attorney

Rosenberg agrees that the best time to refinance is when property values are high and interest rates are low.

“In this scenario, refinancing can add to the general financial health of your property,” says Rosenberg. “And your loan-to-value should be lower. That can lead to more favorable financing terms and the ability to borrow a larger amount.”

Prepare for refi road bumps

Unfortunately, refinancing rental or investment property assets isn’t always easy.

“Often, investors have complex financial backgrounds. They can be self-employed. They can have multiple sources of income. Perhaps they own multiple properties. That makes documenting the assets and income from those properties difficult and time-consuming,” says Ailion.

Feinman agrees.

“Another challenge is that you might not show any income on your tax returns for your property to qualify for a full income loan.

“Also, due to various write-offs, your net income on your tax returns may not accurately reflect the income on your property. That’s because expenses are allowed to be used to reduce taxable income,” Feinman says.

Regulatory documents or liens recorded against your property may also be a problem.

“The terms of these documents and whether the lender will be bound by them in the event of a foreclosure can complicate things,” says Rosenberg.

Have an undesirable credit score or credit issues? That can also make it harder for you to qualify for a refi.

“Be aware that the lender will probably want to review copies of your existing leases. They’ll also likely ask for several years of financials – including tax returns. And they may request other material documents relevant to the operation of your property,” notes Rosenberg.

How to avoid refinance issues and delays

So, how can you avoid these potential roadblocks? The most important thing is to prepare all your documents ahead of time and stay organized.

Getting tax records, income documentation, and other financial information ready beforehand will avoid unnecessary delays.

Use our refinance checklist to stay organized

In addition, make sure you check your credit and debt-to-income ratio before attempting to refinance. Issues in these two areas — too much debt, too little credit — are the two main reasons refinance applications get denied.

If necessary, work to pay down large debts or raise your credit prior to refinancing your investment property. You’ll be more likely to qualify, and get a lower rate to boot.

Where to seek a refinance

Refinance loans are offered by banks, credit unions, private lenders, hard money lenders, and other sources.

“The lowest rates usually come from lenders offering conventional loans sold to Fannie Mae or Freddie Mac,” Ailion says. “In recent years, we’ve also seen refis from regional and national lenders funded through Wall Street or private equity firms.”

The experts caution that many of these financing sources may have stricter rules than you may expect.

Interest rates will always be a bit higher for investment or rental properties compared to primary or second homes. Credit score requirements might be stricter due to the extra risk factor involved,” explains Feinman.

“And loan-to-value will be lower for rental or investment properties compared to a primary residence or second home. Expect your maximum loan-to-value to be 85% to 90%.”

Know what to expect: Interest rates will always be a bit higher on investment and rental properties, and credit and loan-to-value requirements will likely be stricter.

Prepare to pay substantial closing and transaction costs, too.

“Any time you take out a mortgage or refinance you incur these costs,” cautions Ailion. “These can potentially offset your interest rate savings for years.”

For this reason, look closely at how long it will take for your savings to repay the costs of a refi.

“Say your repayment time is longer than you plan to hold the property. In that case, you might not want to refinance,” Ailion says.

Before committing to a refi

For best results, follow these tips:

  • Keep copies of the last two years of your tax returns as well as any leases on your property
  • Wait to refinance until all or most of your rental property is occupied. “Having vacant units could cause an issue with the lender,” says Feinman
  • Keep your credit clean. “Don’t take on any new debt or go late on any payments while attempting to refinance,” Feinman advises
  • Gather all your documents needed. “And don’t rush into anything – go over all the options,” suggests Feinman
  • Try to speak to a licensed mortgage broker who works with many lenders
  • Shop around and compare rates and terms carefully
  • Make a good impression on the lender. “Resolve any tenant issues, physical issues with the property, and any other material factors that could be a red flag to the lender,” Rosenberg recommends
  • Clearly understand the terms of your current loan and refi loan

These steps will not only help you qualify for an investment property refi, but also net a lower rate and see bigger savings on your refinanced loan.

What are current investment property mortgage rates?

Investment property mortgage rates are hovering near historic lows, just like rates are doing for primary mortgages.

Compare personalized rates from a few different lenders to find the best refinance deal for you.

Verify your new rate (Nov 22nd, 2019)