Why should you consider refinancing real estate investments instead of selling them? Maybe you?ve owned a rental property for years, you?ve paid down the mortgage, the value is up, and you want to cash in on that equity. Refinancing would be a better option for you. Why is that?
Two problems are what you will encounter with selling. First, paying a large capital gains tax is what selling means. You can avoid this if you reinvest through a 1031 exchange, but then the point is that you want your money, right? Second, you?ll be giving up your inflation-indexed retirement plan. More income is generated by a good rental property as rents go up.
Why You Should Refinance Real Estate Investments
If you refinance, even without paying a penny in taxes, you can get much of your gain out of the property. The thing is, borrowing money is not a taxable event. Take your loan proceeds and spend them however you want, and still keep your rentals. Doesn?t that sound better than losing a big chunk of your equity to taxes?
Let?s try to look at an example. Perhaps a small apartment building is what you have owned for several years. Perhaps you have bought if with a down payment of $80,000 and bought it for $340,000. During that time, interest rates were at 9.5% and this gives you a payment of $2,106 monthly on the balance of $260,00 (30 year amortization).
The property is now worth $560,000, and you owe $220,000. For each month, your cash flow is around $2,000. Now, how do you get at some of that equity? If you sell, you will give up the income, AND pay a big part of the profit in taxes. What would happen if you refinance?
If a bank will loan you 70% of the value, that would be $392,000. By paying off the first mortgage, you are left with $172,000. There are no taxes due and you can spend it any way you want.
When interest rates are low, then it gets even better. If the new interest rate is 6.5%, your new payment will be $2295. What this means is that you can spend $172,000 any way you want and each month, you will still have a cash flow of over $1,800 from an inflation-indexed retirement plan.
Here is an even better scenario. Spend $50,000 of the loan for high-return upgrades to the property, such as carports and a laundry room, and raise the rents. You could have a higher cash flow than before as well as have $122,000 leftover to spend any way you want. Isn?t that sound better than selling your retirement plan? When you want that cash, consider refinancing real estate investments.
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Source: http://www.dialup911.com/how-to-refinance-real-estate-investments/
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