If you’re thinking of selling or to refinance an apartment building, it’s a given that you’ll want to make as much money as possible from doing so. One of the biggest questions on your mind is probably: Should you refinance or sell now or wait? Another option is to cash-out refinance the apartment building Not to be a cop-out, but that depends on a few factors.

Some of the considerations you should run through are future market conditions, the level of value you’ve added to your property, the likely returns from each option, the potential cash-on-cash return (the ratio of income earned to money invested) and the return on investment from a cash-out refinance. Let’s run through each of them in turn.

A quick example why to refinance an apartment building

Let’s say that you owned an apartment building with under-market rents five years ago, and since then, the yields increased by 40%. This sounds good so far, but there are a few more factors to consider. 

In this case, the cash-on-cash return is projected to be 5% per year, you’ve already created about 90% of the value, and the market seems more or less stable (interest rates and cap rates could increase but demand is expected to counteract this effect).

To compare the impact of selling the building in the next few years, selling it now, and refinancing it, we need to work out how much each option would yield.

Comparing returns

To figure out the returns that are likely from each option, you need to compare them in a meaningful way. And to do that, we need to take a look at the internal rate of return (IRR). Yes, that might sound like a scary piece of terminology, but bear with us.

Also, before we get into it, you’ll need to have a financial model detailing the cash flows from your investment, including any money from a refinancing or sale. Once you have that ready, you can get started.

Using the internal rate of return

Unlike the annual return (the usual metric used), the IRR accounts for the time passed since an investment was made, the cash flow generated, and capital involved in the investment (as both an input and output). 

This needs to be used in place of the annual return in the case of refinancing, because you invest in the capital (when you first make a purchase) and then return it (when you refinance), before selling. As we’ve seen, the cash-on-cash return is the ratio of income earned to money invested — but since refinancing means you have less money invested, it artificially inflates the cash-on-cash return. The annual return also loses meaning.

Through complex calculations, the IRR also accounts for how the value of money changes over time. Even putting aside considerations of inflation, most people would rather have $10,000 today than $10,000 in ten years time — scratch that, most would have a strong consideration for $1000 today versus $1000 in ten weeks.

Yet since the IRR accounts for these inherently human preferences, it makes it possible to compare investments over different time periods in a more realistic way. Sure, something might offer a higher return in theory, but most people wouldn’t find that as valuable if they have to wait a long time for it.

Finally, to compare the yields of different circumstances, you’ll need to calculate the IRR for each scenario:

• Refinance
• Sell now
• Sell later

Analyzing the results

To finally calculate the IRR for each case, you’ll need to get the data from your financial model and create an Excel table. This should contain cash flow distributions, your initial investment, and any capital returned along the way (such as through refinances or sales).

Let’s return to the example we examined at the start of the article — what would be the results if we decided to refinance after three years and sell after seven years?

These were the results:

• Selling after three years resulted in an IRR of around 13%
• Selling after five years resulted in an IRR of roughly 10% (lower because of the passing of time)
• Refinancing after three years, returning the capital invested, and then selling after seven years results in an IRR of 9% (due to the low cash flow)

Since it’s at year three that most of the value has been built into the property, this analysis suggests it would be better to wait to get as much value as possible out of the apartment building and then sell it. In this case, waiting longer to sell or refinancing wouldn’t be as profitable due to the poor cash flow. However, for a property with better cash flow, the opposite would likely be true, and the pendulum would swing toward refinancing. 

But these results are far from universal — they depend on the numbers of a particular property investment. Now, it’s time to work through your own scenario by putting your results into an Excel sheet. How do your results compare?

Is there ever a right time?

Carrying out the analyses above is a priceless tool for working out the optimal time to sell, although you might still find it emotionally difficult to act on the results. Taking the plunge and making a sale is a huge move, and it can be difficult to adjust to not receiving the income from your property (even if you know it’s better to sell in the long run).

However, there’s always a little room for maneuver depending on your personal circumstances — maybe passive income is more important to you than optimizing for returns. But just remember to crunch the numbers first so you can make an educated choice as to whether to sell or refinance an apartment building.

If you are not sure whether you should refinance an apartment building or sell it, contact New City Financial for a free consultation by phone at (855) 848-2862 or by email click here

If you are a homeowner looking to refinance your mortgage, you may be wondering what options you have. Refinancing can be an excellent tool for homeowners to save money. You just have to decide which type of refinance is best for you. Here are some of the most popular mortgage refinance options.

Benefits of refinancing

The bottom line for homeowners looking to refinance is to save money. The good news: there are several ways refinancing can save you money. Here are a few of them:

• Lower monthly mortgage payment
• Switch from variable-rate to fixed-rate loan to fixed rate
• Do a cash-out refinance and get funds to make repairs or renovations
• Remove private mortgage insurance (PMI)
• Adjust loan term and save on overall interest paid on the life of the loan

Mortgage Refinance options

So, what are the options? Each refinance comes with unique features and qualification requirements. Here are some of the most popular mortgage refinances:

Cash-out refinance

A cash-out refinance is a type of refinance in which you replace your existing mortgage with a loan greater than what you owe on the property. The difference then goes to you in cash to use for anything you’d like. This could be a good way to get cash for much-needed repairs or to invest in a renovation project to increase your home’s value.

Cash-In Refinance

Rather than taking out a larger loan amount as you would with a cash-out refinance, a cash-in refinance means you are putting a sum of money towards the mortgage balance. By doing so, you decrease your loan-to-value (LCT) ratio. Owning more equity in your money could translate to better rate terms, a lower monthly payment, or a lower interest rate.

Rate and Term Refinance

If you took out the mortgage on your home when interest rates were higher or you were in a worse off financial situation, you could refinance to adjust the rate and term of your loan. This means you lock in a lower interest rate or take advantage of more favorable loan terms. This could lower your monthly payment.

FHA Streamline Refinance

If you already have an FHA loan, you could choose an FHA streamline to refinance to skip the appraisal and still get your lower monthly payment. Within the FHA streamline refinance process, you have two options:

1. Credit-qualifying– Your lender runs a credit check and evaluates your debt-to-income ratio
2. Non-credit-qualifying

VA Streamline Refinance

Also called a VA IRRRL, is a great option for borrowers who already have a VA mortgage loan. With this type of refinance, you can skip the appraisal, lower your interest rate or change your loan term. You can also refinance up to 120% of your loan value.

USDA Streamline Refinance

Another option for borrowers looking to skip the appraisal, USDA loan holders can take advantage of a USDA Streamline Refinance. Even if you own little equity in your home, you can refinance to lower your monthly payment through a lower interest rate or changing the loan terms.

Reverse Mortgage Refinance

For borrowers over the age of 62, a reverse mortgage can allow you to pause your mortgage payments while alive. You could even receive funds from the equity you already own in the property to put towards anything you’d like. The loan balance is paid to the lender upon the sale of the property or the borrower’s passing.

No Closing Cost Refinance

There will be closing costs with any closing, whether it be a purchase, sale, or refinance. A no closing cost refinance tacks those closing costs are accounted for with the loan through a higher interest rate or by tacking them onto the principal loan amount. This is a great option for borrowers who may have difficulty coming up with the upfront closing costs.

Short Refinance

If you have defaulted on payments, a short refinance is a way to avoid foreclosure. You refinance for a loan lesser than you previously had so that your monthly payments are more affordable. This is a way for your lender to mitigate the risk of you foreclosing while you still keep your property.

The Bottom Line:

Homeowners can take advantage of refinancing to save money on their mortgage loan. There are several different types of refinances are suited for different borrowers in their unique circumstances.

To get started on your refinance, contact us today at (855) 848-2862 . We’d love to speak with you.

If you are a rental property owner, refinancing can be a great tool to save money. You may be familiar with the process of refinancing a primary residence, but what does it mean to refinance a rental property? How does the process differ? In this article, we’ll look at what rental property owners need to know about refinancing.

Why refinance a rental property?

The end goal of refinancing is to save money. As a rental or investment property owner, this could mean freeing up funds to grow your business. Here are just a few reasons why you might want to refinance your rental property.

• Lower monthly mortgage payment
• Switch from variable-rate to fixed-rate loan to fixed rate
• Do a cash-out refinance and get funds to work on other projects or invest back into the property
• Remove private mortgage insurance (PMI)
• Adjust loan term and save on overall interest paid on the life of the loan

Lower monthly payment

By refinancing when rates are low, you can lower your monthly payment. Not only will this allow you to put those extra dollars to good use every month, but you will save a significant amount over the life of the loan.

Switch to a fixed-rate loan

Variable-rate loans can be beneficial in the short term to lower your monthly mortgage payment. However, making the switch to a fixed-rate loan while interest rates are low can save you from future rate spikes. With a fixed rate loan, your monthly payments stay the same, despite market fluctuations.

Adjust loan term

The duration of the total loan affects monthly payments. Extending your loan term from a 15-year rate to a 30-year rate will lower your monthly payment and free up cash for other endeavors.

Cash-out refinances

A popular option for rental property owners is to cash out refinance. By taking out a loan greater than what you owe on the property, you can get cash at closing to use for anything you want. This money could be put towards renovations, repairs, or used for other investment projects.

Remove PMI

If you put down less than 20% when you bought the property, you pay private mortgage insurance in your monthly payment. If you have made enough payments and have a sufficient loan-to-value ratio, you can refinance to get PMI removed entirely.

Requirements to refinance rental property

Since rental properties are generally a greater risk than primary residences, the process to refinance tends to be stricter. Here is what you will need to prepare for:

• Have sufficient cash reserves.
• Increase your credit score. 660 and up.
• Have high equity
• Decrease your debt-to-income ratio

Easy steps to refinance a rental property

1. Establish your refinancing goals

Knowing what you want going into the process will help you achieve your desired outcome. Are you looking to lower your monthly payment? Get rid of PMI? Access funds to make upgrades on the property?

2. Gather your documents

The first step will be to prepare your documents to submit to the lender. They will request several documents related to your financial standing. Below are commonly requested items:

• Last two pay stubs and W2s
• Last two years of tax returns
• Bank statements
• Lease agreements
• Proof of rental property insurance

3. Shop lenders

Who you choose to work with on your refinance is important. Be sure to browse different lenders and loan programs before you make a decision. Ask for a quote to compare and ensure you are getting the best deal possible.

4. Submit loan application

Once you have landed on a lender, it is officially time to apply. You have already prepared your documentation, so now you will complete their application. At this time, they will run a credit score to get more information about your financial situation.

5. Lock interest rate

Locking your interest rate means guaranteeing a specific rate for a disclosed period of time. These rate locks may last anywhere between 15 and 60 days. If you need to extend this lock due to a delay in closing, there will usually be a small additional charge.

6. Wait for underwriting

The lender will review your financial information during the underwriting process to confirm that you can afford your new loan payments. Be sure to answer all requests for information verification promptly to prevent any delays. The lender will also order an appraisal to ensure the loan amount is on par with the property’s market value.

During this process, the title company will conduct a search to determine any title issues. These could be outstanding liens or claims on the property that will need to be resolved before closing.

7. Time to close!

You will sign a preliminary “Closing Disclosure” to review and sign a mandatory three days before closing. The CD will list your loan amount, interest rate, and monthly payment, as well as the expenses related to the refinance. These fees make up the closing costs and typically include escrowed taxes, the appraisal fee, insurance, recording fee(s), and settlement fee(s). Finally, you will meet the title company on closing day and sign all the paperwork to finalize the refinance. If you are interested in refinancing your rental property to save money, contact us today. We would love to work with you and guide you through the process to refinance your rental property.