Let me start by sharing a conversation I had recently. While running some Saturday morning errands, I ran into Tom, an acquaintance of mine. After some small talk, we turned to the juicy stuff – our investments.
“So tell me, Tom, how’s your investment condo downtown doing?” Tom looked at me and chuckled.
“To be honest, I’m not really sure. My condo is giving me great cash flow, but we may sell to free up some money for other investments,” Tom stated firmly.
“Interesting. Have you considered refinancing your property to free up cash?” I responded.
“What do you mean?” Tom seemed confused.
I see this way too often: the clock-maker investor. These investors will set up their mortgage when they first purchase a property — this is the winding of the clock. After that, they set the clock in motion. Their mortgage ticks away, collecting dust until the mortgage term ends.
No re-evaluation, no grand renegotiation, no overall strategy.
Yet, if Tom took some time to evaluate and assess his financing options, he can save himself thousands of dollars in the long run. And, Tom can increase his ability to obtain more investment properties without selling. Let me explain.
Whether you’re a first-time homebuyer or a seasoned real estate investor, you should be re-evaluating your mortgage (or mortgages) every year. It’s surprising what you may find. Often times, a refinance can save you hundreds or even thousands of dollars per year.
So, the class is now in session. Who can tell me what refinancing is?
“Refinancing is simply replacing an older loan with a new loan offering better rates and/or terms.” Very good!
Refinancing is usually done for two reasons. A) You refinance to take advantage of better interest rates; or, B) you’re freeing up capital for other investments. Reason B is also known as leveraging, a topic that we’ll be expanding on in the weeks to come.
The perceived downside to refinancing are the refinancing fees. Yes, sometimes there are nominal fees. But, because refinancing is done for better rates, terms, or to free up money for more investments, the refinancing payoff will outweigh the penalty. In most cases you will pay off these fees in no time with the amount of money you can save on a monthly basis.
And the savings add up. Even if you save $75/month on your property, that’s an extra $900 a year in your pocket. And for those who have accumulated multiple properties? We’re talking thousands of dollars per year you could be saving. Or, what I do and advise is to use this money to add to your real estate investment portfolio.
Simply put, you can open up many investment avenues from reviewing your mortgages.
So go on, set a date on your calendar to revisit your mortgages. Make it something memorable, like your half birthday. Buy yourself a treat, a nice bottle of wine, and sit down with your mortgages.
Oh, and Tom? He emailed me a couple weeks later. Without getting into specifics, Tom told me he had refinanced, kept the investment property, and was in the market for another one. That’s the power of refinancing.
Matt Elkind, CoFounder CONNECT asset management