Blog feature image for “Riding the Refinance Cycle” by LeavenWealth, highlighting strategies for today’s real estate investors.
For many real estate investors, the goal is simple: create a cycle of growth. You buy a property, improve it, refinance to pull your capital out, and then repeat the process with a new property. This strategy, known as the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat), has been a popular way to build wealth.
However, recent shifts in interest rates have made refinancing a bit more complex than it used to be. Understanding how to navigate this new landscape is key to your success as an investor. Let’s explore how the refinance cycle works, what’s different about today’s market, and how you can position yourself for success.
At its heart, the investment strategy is straightforward. As Chris Pomerleau, Co-Founder and Director of Investment Strategy, LeavenWealth, puts it: “Our entire business plan is to buy a value-add property and fix it up in a manner that allows us to refinance in the future, pull that money out, and then roll it into future deals.”
The process involves:
For years, this was a relatively smooth process. Falling interest rates and cap rates meant property values were consistently on the rise, making it easier to refinance within a few years.
The market looks different now. Rising interest rates have had a ripple effect across real estate. Chris explains, “…because the interest rates kept going up, that meant that the cap rates kept going up, which means the value of assets temporarily went down.”
This shift doesn’t break the investment model, but it does change the timeline. Now, refinancing might happen in year five, six, or seven of properties purchased in the last few years instead of the three or four years investors were used to. Patience has become more important than ever.
The best way to provide a strong hedge against risk is a value-add approach. While external factors like interest rates may be out of your control, you can control the property’s income.
Collin Schwartz, Co-Founder and Director of Business Development at LeavenWealth, notes, “We are still protected in our fundamental approach as real estate investors in value-add product. So, the fact is, we are increasing the income of this asset regardless.”
By focusing on improving the property and increasing its rental income, you build a buffer against market volatility. This long-term hold strategy allows you to wait out unfavorable conditions until the time is right to refinance.
“We’re always keeping an eye on the market and staying in touch with our different lenders and different brokers to see when the best time to refinance is,” Chris says.
Flexibility is key. Securing good, long-term fixed debt on your properties gives you the breathing room to wait for the perfect moment. Sometimes, it might even make sense to refinance early if you can lock in a favorable long-term rate, mitigating future risk.
If you’re just getting started, it’s important to have realistic expectations. Today’s market calls for a more conservative approach. Plan for longer hold periods if the interest rates stay high, potentially in the 5–9 year range, before you can expect to refinance. However, should the interest rates decrease from where we are today, refinancing will drop back down to the three to four timeline. This happens because an asset purchased today at an interest rate of 7% is worth more money in two years if the interest rates are then 5%. As long as the net operating income is the same, the decrease in interest rates follows the decrease in cap rates, which increases the value of your asset organically.
Chris offers this perspective: “This allows us to buy something that makes sense now that we know we can increase the value for, and it’s just about that patience moving forward. Just like you would have with your money in the stock market.”
Diversification is another critical piece of the puzzle. Spreading your investments across multiple assets, perhaps through an investment fund, can help spread out risk. This approach ensures you’re not overly dependent on the performance of a single property.
Navigating the current refinance cycle requires patience, a solid strategy, and a long-term perspective. While the timeline may have shifted, the core principles of value-add real estate investing remain as powerful as ever.
As Collin Schwartz reminds us, operators are fully aligned with their investors. “We are invested into the deals. We signed on the debt. That means we are liable for repayment in full. So if there is ever a scenario of true alignment, this is the case.”
This shared commitment ensures that every decision is made with the goal of weathering the storm and achieving success together. If you’re interested in learning more about how to navigate these opportunities, get in touch with the team at LeavenWealth to start the conversation.