What are the Pros and Cons of Refinancing Investment Property?

The decision to refinance investment property is one that just about any investor who deals with residential or commercial real estate will face from time to time. There are actually a number of good reasons why refinancing investment property can benefit the investor, as well as a few situations that could lead to serious financial issues. One of the main things to keep in mind when thinking about refinancing investment properties is to look beyond the immediate effect and determine if the outcome of the strategy will still look as good several years down the road.

An investor may consider refinancing investment property as a means of organizing debt with a greater degree of efficiency. For example, shifts in interest rates may render what was once an excellent mortgage rate on a particular property less than attractive. This is particularly true when the earlier rate was locked in at a time when there was anticipation that average rates would increase during the course of the mortgage. Should the economy move in a different direction and average fixed mortgage rates fall significantly, refinancing investment property at a lower rate makes it possible to save a great deal of money over the life of the refinanced mortgage, and may even result in lower monthly mortgage payments.

At the same time, refinancing investment property can also result in some negative consequences. This is particularly true when the refinancing is intended to generate revenue that will be used to make improvements to the property. Unless there are very clear indications that the return on the property will remain stable for the duration of the financing, there is some risk of losing money on the deal. This means that if the investment property in question is an apartment complex that is renovated only to find that in a few years the neighborhood has deteriorated and several of the units are standing empty, the investor will likely have a mortgage to pay but not enough income from the complex to make the payment.

As with any type of financing, it is important to consider not only the status of the investment property in today’s economic climate, but also how it will perform in the future. Investors must accurately project what will happen in both the local market and in the economy in general, and decide what impact that will have on the ability of the property to generate revenue. In some cases, refinancing investment property will position the investor to make the most of those upcoming events and earn a higher return. At other times, choosing to refinance the current mortgage could create additional debt that ultimately offsets the revenue stream, leaving the investor with an asset that has lost value and can only be sold off at a loss.