If you want to refinance a multifamily property, it’s best to know the appropriate time for that. Otherwise, you would be making a bad move that would make you lose more money.
What is ‘Refinancing’?
In real estate investing, whether it’s single-family or multifamily, refinancing is the process of applying for a new loan. This allows you to get a better interest rate (most of the time….especially now) for the property you purchased.
However, refinancing involves risk, especially if you happen to have a bad credit line or you’re a first-time multifamily investor.
If you ask me, refinancing can be a good strategy for taking advantage of the current interest rate environment. If done right, a refinanced property can consolidate multiple debts and, in the long run, improve the cash flow. Refinancing can also help you distribute equity shares among your investors, allowing you to free up enough capital for another investment.
Of course, considering the risk it entails, you should be able to determine an appropriate time to refinance a home. But how do you know for sure if it’s indeed the right time?
High NOI and property value
In my experience, I would say that the best time to refinance a multifamily property is to wait for the value to increase. It’s a good indicator if the property is enjoying a high net operating income or NOI.
Let’s use a concrete example for this. If you purchase a property worth $5 million with a $500,000 annual NOI, you will have a cap rate of 10%. This would mean that the property was poorly managed prior to the purchase. If you decide on renovating the property and implementing value-adding measures, you will have increased your annual NOI to $550,000, assuming a small drop in the cap rate.
This would mean that your efforts in renovating the property and setting up a more efficient management system have led to the property’s appreciation. From $5 million, the value would have increased to $5,875,000.
So, to answer the question above, an improved property value would be the best time to refinance a multifamily investment. If done right, this would allow you to obtain a cash-out refinance. In other words, you will be able to pull some of the equity out of your current property.
You can use this to finance another multifamily acquisition. It’s also possible to use it for renovating your property.
However, it’s important to keep in mind that your property should be stable and, again, has a good value before you consider refinancing.
Getting your property refinanced
If your multifamily property is ripe for refinancing, it’s imperative to go through the same steps you went through when you first acquired it. This means that you will have to locate a good lender, negotiate terms, work with your lawyers and property managers. You should also review and execute the needed documents. When everything’s already set, you can now finalize the loan on good terms.
It’s a tedious process, but it ceases to be an uphill climb if you are in the right position to apply for refinancing. With that being said, it’s important that you have a good debt-to-loan ratio which is less than 75 percent.
Moreover, lenders may need to appraise the property to determine if it promises a stable income stream. They may have you sign a personal guarantee just in case.