By Fred Matera, CIO, Redwood Trust A lack of affordability will lead to near-term weakness,…
By Rachel Adams
Despite the turbulent pandemic and now wartime economy, the multifamily market has continued to grow and remain resilient. For this reason and more, it has established itself as a reliable and appealing asset in which to invest or reinvest.
Multifamily real estate investors who intend to hold on to their properties long-term should consider refinancing their assets. Refinancing debt and equity on multifamily properties comes with numerous benefits, and it often allows investors to achieve more value than they would by selling. Below are 3 key benefits to multifamily refinancing.
1. Maximizing Equity to Grow Real Estate Portfolio
For investors who have significant equity in their multifamily properties, the ability to leverage that equity and cash-out refinance is a major advantage. By doing this, investors can pull cash directly from the property and use that money to purchase additional properties. Investors who own their multifamily assets free and clear can use this advantage to acquire new properties and grow their real estate portfolio. Even if an investor does not have a significant amount of equity in their multifamily property, or if they are only looking to pull out a certain amount of cash from the asset, this money can be used for down payments on new acquisitions. Having the ability and funds to acquire additional assets, especially multifamily ones, allows investors to capitalize on the scalability of owning multiple income-producing units at once. This enables them to quickly expand their individual business and profitability.
2. Accessing Renovation Funds via Cash-Out
Investors can also leverage their equity to pull cash-out for funding renovations. Properties will inevitably need updates during the period of ownership due to standard “wear and tear”. However, investors often have much of their cash tied up in these assets. A cash-out refinance provides access to funds without having to pay out of pocket. This can take a sizable burden off of investors, especially when the renovations needed are expensive. Even when improvements to the property are not necessary, a cash-out refinance offers the opportunity to institute value-add renovations. This will provide justification to raise rents to market price and increase property value.
3. Increase Cash Flow and Reduce Overall Mortgage Costs
Lowering overall mortgage cost is one of the most noteworthy incentives to refinance multifamily assets. If investors intend to hold onto their properties long term, then refinancing out of their current loan into a new loan with a lower interest rate can potentially increase cash flow by decreasing monthly interest payments.
Learn More : What is Leverage in Real Estate
Furthermore, in a favorable interest rate environment, if investors have balloon payments on their mortgages approaching it may be beneficial for them to refinance their loan and incur the associated pre-payment penalty. Oftentimes, the long-term benefits of refinancing and securing a more aggressive interest rate will supplement and exceed the pre-payment penalty incurred.
Refinancing can be advantageous for investors in multiple ways, and we highly recommend weighing those benefits when considering the long-term goals for your multifamily property. Whether you have equity in your multifamily property and are looking for a way to grow your business, need a new source of funds to complete renovations, or want to take advantage of more competitive interest rates, refinancing your multifamily property provides you with additional options to create value.