Mortgage Refinancing Strategies for Landlords

Refinancing is one of the smartest strategies used by experienced and first-time investor alike.

By capitalizing on the progress you’ve nurtured in your investment properties, you can achieve better, more advantageous loans and free money to fund your next investment.

But how does refinancing work? What strategies can investors use to maximize the return on refinancing?

Here are a few common mortgage refinancing strategies to help you get the most out of your investment properties and loans.

Change the Loan Term Length

One common mortgage refinancing strategy is to change the term length.

Let’s say you have a 30-year fixed-rate mortgage. Refinancing to a 15-year loan can help you get out of debt faster. If debt is severely inhibiting your plans for expanding your portfolio, refinancing to a shorter loan might greatly help you achieve your goal.

It might make sense to refinance to a longer term loan. Why? Let’s say you already have a 15-year loan, but you’re devoting so much of your rental income to your mortgage payments that you have little left to advance or improve your investments.

In this case, you might consider refinancing to a 30-year loan. You’ll be in debt for longer, but the amount of your monthly mortgage payments will be significantly reduced. This means you have more money freed up to reinvest in your properties, which in turn will help you increase revenue generation and pay off other debts.

Switch to a Fixed-Rate Mortgage

Another popular reason to refinance a rental property is to switch to a fixed-rate mortgage.

Investors with adjustable-rate mortgages can never truly predict how their loan will impact them in the long run. This is because interest rates for adjustable loans are subject to change after a certain number of years.

Instead of accepting this variability and the damage it might cost you down the line, many landlords prefer to switch to a fixed-rate loan. This way, you can lock in a low interest rate from day one and count on it to stay the same even as the market or other variables change.

Use the BRRRR Method

The BRRRR method real estate is one of the most popular refinancing strategies in 2022. BRRRR stands for buy, rehab, rent, refinance, and repeat.

Here’s the basic idea of this strategy:

• Buy – Purchase a property at below-market value. These properties might need significant repairs, renovations, or improvements.
• Rehab – Improve the property as efficiently as possible. The goal is to add value – extra bedrooms, hardwood flooring, etc. Any feature that adds value to the property can be used as leverage later.
• Rent – Advertise the renovated property and rent it to tenants. Your improvements can be used to justify a higher rent rate.
• Refinance – After you’ve begun generating consistent rental income, get your property re-appraised. Hopefully, the improvements you made will translate into an increased appraisal value. Then, take this value to the bank and refinance your loan.
• Repeat – Continue these steps with other properties.

The BRRRR method is so popular because it flips properties that would otherwise be very risky investments for both you and your lender. The key is in adding value to the property and demonstrating this increase when you seek refinancing.

Cash-Out Refinancing

Cash-out refinancing is the process of withdrawing the equity you’ve built in a rental property over time. You can then use these funds to invest in another property or achieve a different goal.

Cash-out refinancing is similar to a home equity loan, which uses your home equity in collateral in the loan. Like the BRRRR method, the power behind this strategy lies in the appraisal or value of your property. Improving your property can increase the likelihood that you get an attractive loan.

Conclusion

When it comes to refinancing, there are a variety of strategies landlords use to get the best deals. By using any of these approaches, you’re one step closer to securing the ideal loan for your rental.