Refinancing investment properties continues to be a hot topic among real estate investors. The combination of historic low interest rates and rising housing values has lead investors down the refinance path quickly. But many investors take the refinance for granted and miss out on speed and additional value creation.
11 Steps to Refinancing Investment Properties
Step #1: Stabilize the mechanical and aesthetic condition of the property.
It’s important that any changes needed at the property get done prior to refinancing it. Typical items would include new roof, new HVAC units, painting, plumbing, adding a wall to create an additional room, etc. By making the rehabs prior to the refinance, the valuation of the property will be higher, which will allow you to pull out more money in the refinance. Make sure to save your receipts. Some lenders will want to see proof of the cost that you put into the property.
Step #2: Sign new leases at market rents.
Oftentimes properties are rented below market value due to landlords not increasing rents each year or landlords not realizing market value. The process of getting leases at market rent may take a few months, as you may need to evict tenants who are not currently paying rent. Our property management company does everything possible to get month-to-month leases turned into new year-long leases. This is especially helpful for old leases, which may not have the best protections for home owners.
Keep in mind, new leases at higher rates will matter more for 5+ unit buildings, commercial, or mixed-use buildings. These types of buildings require a commercial appraisal. Commercial appraisals use the net income of the property as one of the major ways to define the value. Higher leases can dramatically increase the value due to the cap rate multiplier used. An increase in $100 per month for one lease of a building could increase the value $15k if there are no other costs added!
Step #3: Put financial documents on Google Drive.
This sounds like a little detail, but one huge issue with refinancing properties is getting approved by a bank. You want to make it as easy as possible for a banker to approve you. Plus, you want to decrease your own time. Most bankers will request the same documents—so you can give each banker an updated Google Drive link that has everything they need. Documents usually include tax returns from 3-5 years, rent roll schedules of current investment properties, a copy of your driver’s license, real estate management experience, and a personal finance statement. While each bank will have their own version of the personal finance statement, they will usually accept a general one as well.
Step #4: Be up front with the banker.
We find that bankers work better when all of the cards are on the table from the beginning. When we were first getting into real estate investing, we were candid that we had just started investing. Certain banks love working with newer investors, while other banks may want to see years of experience. Either way, you get to the point quicker and do not waste anyone’s time. Ultimately, the lender usually wants to get the deal done for you and is your ally through the approval process.
Step #5: Create relationships with bankers.
When we first started investing, a mid-sized bank was not interested in working with us because we wanted to refinance at 80% loan-to-value. So, we worked with smaller credit unions that were happy to work with us at those terms. However, we kept building a relationship with this bank even though they weren’t doing loans for us. After two years and numerous lunches and meet ups, the mid-sized bank changed course and gave us the exact terms we asked for. They had seen our relationship and business grow over the years.
Step #6: Negotiate more than just the interest rate.
For the first deal we ever did, I remember calling six different banks to “shop” interest rate terms. I settled on the lowest interest rate, not considering any other terms. When I got to closing, I realized there was a 1.25% initiation fee. Plus, there was another $500 in totally random fees. The fees easily made this a less desirable loan than others we were offered, but we didn’t even realize it because we were fixated on the interest rate. Things that we now focus on include length of fixed interest rate, overall length of loan, fees at closing, appraisal cost, percentage of loan-to-value, and time to close. I’m not saying interest rate doesn’t matter, but often those other metrics are easier to negotiate and can make a huge difference on overall returns.
Step #7: Meet with the appraiser.
Typically a property has a back story to it. We always make sure the appraiser understands the back story of the property. For example, let’s say we bought a $100k multi-unit building 5 months ago. And let’s say the building was overrun with drug addicts who weren’t paying rent, so we bought a security system and got new tenants in the building. I would want the appraiser to understand everything that we had done because the property would most likely appraise higher with that additional info.
Step #8: Pull comps of similar properties for appraiser.
This step is REALLY important. I like to pull comps that help tell the story we are trying to tell. The comps should be similar properties with similar (or higher) values. While you may think that it’s the appraiser’s job to pull comps, I prefer to help them avoid missing key comps.
Step #9: Make sure appraiser stays on track with timeline.
This sounds very odd, but often timing in these deals matters. When we refinance a property, we typically have another property that we are using the funds to acquire. A couple of our appraisals were delayed weeks because the appraiser didn’t get a report completed on time. As you know, delays on the buying side can throw off future acquisition deals. I typically like to check in with the appraiser and banker about once a week through the process to remind everyone when we want to close and make sure nobody is behind. It’s amazing how much it can help to keep things on time with a simple check-in.
Step #10: If appraisal comes back low, challenge the appraisal with evidence and data.
There is typically a lot of data that goes into an appraisal. The same property can easily appraise at a range of 10% based on a wide variety of factors. When we first got into investing, we assumed that an appraisal was the final word. But we have found that occasionally you can send an appraiser additional guidance, data, and info that may help improve the appraisal. This will never work 100% of the time, even if your data is accurate. But we strongly urge you to give it a try and to use data and facts to guide your points.
Step #11: Keep asking for better terms from the bank as your business grows.
For future refinances, never be content with the lending terms. As I mentioned before, most of the terms are highly negotiable. As your net worth and experience increase, you are much less of a risk to a bank. Use that lower risk to your advantage. Get your lender to lower your fees, decrease your rates, or put down less money at closing.