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Why You Should Refinance Your Multifamily Property in 2023
Refinancing an investment property can help you lower your rates or tap into your equity at an ideal time.
Strong market fundamentals, favorable economic conditions, and low interest rates have made the past couple of years ideal for borrowers and lenders in the multifamily industry. The robust lending market also provided diverse opportunities for those looking to refinance their loans, allowing them to lock in lower rates, adjust their repayment period, or opt for a cash-out refinance.
Although rates have increased considerably as the Federal Reserve attempts to curb inflation, when compared to the record-low interest rates seen in 2020 and 2021, rates are still relatively low, historically speaking.
That means if you've got a floating-rate loan, it's not too late to lock in a good, long-term rate. Similarly, if you're an investor looking to free up equity for new investments, today will undoubtedly be better than tomorrow, as the Fed contemplates further rate increases.
In the article below, we examine the advantages refinancing can provide in today’s economic environment and dive into the steps that need to be followed in order to get approved for a new loan.
The Benefits of Refinancing a Multifamily Property
Adjusting Loan Terms. One of the major advantages of refinancing an investment property is the ability to opt for more favorable terms. Adjusting the loan term might provide the option to choose a longer-term, fixed-rate loan to avoid economic uncertainties in the future and lower your monthly payments. A refinance might also allow you to shorten your loan term in order to pay the property off faster. Either way, refinancing can allow you to adjust your loan terms to better suit your financial needs.
Lower Interest Rate. Refinancing your multifamily property can also result in lower interest rates, especially if you took out a loan during a higher interest rate environment. Although rates have moved up since March 2022, the average rate for a 30-year fixed rate mortgage is still lower today than it was in 2018, as an Investopedia article mentioned. Qualifying for a lower rate now might save you thousands of dollars throughout the lifespan of the loan.
Cash-out Refinance. A cash-out refinance might allow you to tap into the equity you have accumulated over the years. A cash-out refi replaces the old funding with a new loan that is larger than the amount needed to pay off the old note, a Forbes article explained. The difference between the two loans can be kept by the borrower and used for property upgrades or investing in another asset.
Things to Consider Before Applying for a Multifamily Refinance
Have Enough Equity. Before qualifying for a refinance, you must have at least 25% of equity in the property. This usually depends on the lender, however. In most cases, the loan-to-value ratio (LTV) cannot typically exceed 75%.
Prepare Your Documents. To qualify for refinancing, you will need to prepare recent W-2 forms or pay stubs, current lease agreements for the property, and the most recent two years worth of personal and business tax returns. Other documents needed might include asset information, title insurance, and a property appraisal documentation.
Debt-to-Income Ratio (DTI). The lender will want to check that the borrower is not taking out more debt than it can handle. The debt-to-income ratio is calculated simply by dividing the total monthly debt payments by the total monthly income. An ideal debt-to-income ratio is usually around 36% percent or lower, but under no circumstances should it be higher than 50%.
Closing Fees. Closing on any loan or investment usually comes with additional costs, and refinancing is no different. Refinancing a loan typically costs around $5,000, however, this fee usually varies depending on the size of the loan and the location of the property.
Related Questions
What are the benefits of refinancing a multifamily property?
The benefits of refinancing a multifamily property include the ability to adjust loan terms, potentially lower interest rates, and access to cash-out refinance options. Adjusting the loan term might provide the option to choose a longer-term, fixed-rate loan to avoid economic uncertainties in the future and lower your monthly payments. A refinance might also allow you to shorten your loan term in order to pay the property off faster. Qualifying for a lower rate now might save you thousands of dollars throughout the lifespan of the loan. A cash-out refinance might allow you to tap into the equity you have accumulated over the years, replacing the old funding with a new loan that is larger than the amount needed to pay off the old note, as explained by Forbes. The difference between the two loans can be kept by the borrower and used for property upgrades or investing in another asset.
What are the risks associated with refinancing a multifamily property?
When it comes to refinancing a multifamily property, there are a few risks to consider. Construction costs have risen dramatically over the past few years, and this can impact renovation work as well. Janover data reveals steady stream of CRE loan inquiries and it's important to do your research and plan ahead with a strong budget before beginning apartment renovations to avoid any nasty surprises.
Construction delays are also an unfortunate fact of life. Due to supply chain issues, some cannot be avoided — so it may be best to take a very conservative approach in terms of your project timeline. Don’t assume you will have rents in place the month after your capital improvements are scheduled to wrap up.
Finally, your renovation work may simply not be enough to get the investment outcome you’re looking for. You may invest a lot of capital to add the highest-end luxury amenities to a property built in the 1980s — but if potential renters are looking for a newer building, you may not see much of an uptick in occupancy or rental revenue.
For those planning to accelerate refinancing plans, life companies, banks, and credit unions might provide the best options, as these lenders often offer early rate locks to protect clients from increasing rates. Additionally, savvy investors looking to hold their properties for a more extended period might consider taking a cash-out refinance to tap into equity accumulated over the years.
What are the current interest rates for multifamily property refinancing?
The current interest rates for multifamily property refinancing are 4.95% - 7.05%, according to Multifamily Mortgage Rates.
What are the best strategies for refinancing a multifamily property?
The best strategies for refinancing a multifamily property depend on the owner's goals and the current economic conditions. Refinancing can help you pay off existing debt, free up cash to renovate your asset, and obtain lower interest rates. If you are facing near-term debt maturity, you may want to consider refinancing to lock in a longer-term fixed-rate loan to protect yourself from further rate increases. Additionally, savvy investors may want to consider taking a cash-out refinance to tap into equity accumulated over the years.
For more information, please see the following sources:
What are the tax implications of refinancing a multifamily property?
Refinancing a multifamily property can have a variety of tax implications, depending on the type of loan and the terms of the loan. Generally, the interest paid on a loan used to purchase or improve a rental property is tax deductible. However, if the loan is used to refinance a rental property, the interest may not be deductible. Additionally, if the loan is used to refinance a rental property and the loan amount is greater than the original loan amount, the difference between the two loan amounts may be considered taxable income.
For more information on the tax implications of refinancing a multifamily property, you can consult a tax professional or visit the IRS website.
What are the most important factors to consider when refinancing a multifamily property?
The most important factors to consider when refinancing a multifamily property are:
- Have Enough Equity - Before qualifying for a refinance, you must have at least 25% of equity in the property. This usually depends on the lender, however. In most cases, the loan-to-value ratio (LTV) cannot typically exceed 75%.
- Prepare Your Documents - To qualify for refinancing, you will need to prepare recent W-2 forms or pay stubs, current lease agreements for the property, and the most recent two years worth of personal and business tax returns. Other documents needed might include asset information, title insurance, and a property appraisal documentation.
- Debt-to-Income Ratio (DTI) - The lender will want to check that the borrower is not taking out more debt than it can handle. The debt-to-income ratio is calculated simply by dividing the total monthly debt payments by the total monthly income. An ideal debt-to-income ratio is usually around 36% percent or lower, but under no circumstances should it be higher than 50%.
- Closing Fees - Closing on any loan or investment usually comes with additional costs, and refinancing is no different. Refinancing a loan typically costs around $5,000, however, this fee usually varies depending on the size of the loan and the location of the property.