If you're a real estate investor, you know how important it is to maintain decent cash flow. And so it often pays to mortgage the properties in your portfolio rather than buy them outright, even if the latter is an option.
If you're carrying at least one mortgage now, you may want to consider refinancing it sooner rather than later. Here's why.
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1. Rates are already climbing
Refinance rates, which tend to be a little bit higher than the rates you'll see available for purchase mortgages, are already starting the year off higher than they were in 2021. As of this writing, the average 30-year refinance rate is at almost 3.7%
Historically speaking, that's still a competitive rate. But if rates continue to climb, refinancing won't hold the same appeal, so you may want to jump on that opportunity sooner rather than later.
The Federal Reserve had already indicated that it's looking to raise rates in the course of the coming year. And while the Fed doesn't set mortgage rates, it influences them. There's a good chance the average 30-year refinance rate will reach upward of 4% in the course of 2022, so it pays to get in now, while rates are lower and savings opportunities are more abundant.
2. Your property taxes could rise
Real estate investors and homeowners alike should be gearing up for higher property taxes this year. That's because home values have risen across the board, and those taxes and market value tend to go hand in hand.
A mortgage refinance could help offset a property tax hike if the savings are substantial enough. And while you may be inclined to raise rents to help offset a higher property tax bill, whether that strategy will actually work out for you is a different story. If you implement too drastic a rent hike, you might struggle to retain your existing tenants or find a replacement.
3. You can tap your home equity and build out your portfolio
As of 2021's third quarter, U.S. property owners were sitting on a collective $9.4 trillion in home equity, according to Black Knight. And that makes now a good time to look at doing a cash-out refinancing.
Given that refinance rates are still competitive, a property you own is a good cash source to tap. You can use that money to add to your real estate portfolio, renovate an existing property you own to justify a large rent increase, or invest elsewhere, such as loading up on REITs (real estate investment trusts).
Consider a refinance early on in the year
Many property owners have been spoiled by record-low mortgage rates throughout the latter part of 2020 and 2021, so today's rate offerings may read like a pretty unappealing deal. But historically speaking, rates are still very competitive, so it's certainly not a bad time to look at refinancing.
But if you're going to go this route, move quickly. It's easy to make the argument right now that today's refinance rates are low enough to be attractive, but if they climb steadily, that may cease to be the case.
