Should you refinance your rental property

Refinancing is on the table for many investors right now, and we’re fielding lots of questions about refinancing personal investment properties. In this post we’ll talk about a real scenario from one of our investors and dive into my thought process on refinancing and a key consideration before you decide. 

Example Scenario

• Current Rate Reduction: 0.6%

• Monthly Payment Reduction: $166

• Refinance Fees: $1,800

Let's take this scenario at face value. The first thing to consider is the potential for another rate drop soon. Experts are split, but most agree another cut is likely. Some are even predicting an emergency rate cut of up to 75 basis points this year. I personally don’t think that big of a cut is coming that soon, but most experts do agree it’s not a question of IF a rate cut is coming but WHEN. 

Timing Is Everything

If you believe another rate cut is coming soon, you might want to hold off. Most refinances come with penalties or fees if you refinance again within a short period. However, these fees might be reduced if you refinance with the same institution. So, if you think rates will drop again soon, it could be worth waiting.

Investment Perspective

Consider the refinancing fees as an investment. You're putting $1,800 into an asset that will save you $166 per month, totaling $1,992 per year. This scenario presents a cash-on-cash return of over 100% for the first year. 

For most investors, using leverage to boost cash flow and long-term appreciation is the goal, not paying off properties outright. So it’s likely a good idea to refinance in this scenario as all investors would take a 100% cash-on-cash investment. 

Given these numbers, refinancing seems like a no-brainer. The real question isn't if you should refinance, but when. I like to compare these decisions to something I know, like a syndication deal or a stock purchase. If you had similar returns and risk in a refinance as in a syndication deal that was offered to you, would you take it? 

In these scenarios refinancing makes sense for most investors, just be conscious of your timing or double check with your institution on the fees of refinancing again if rates do drop in the near future.