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. You will do better to
refinance. Here's why.
There are two problems with selling. First, selling means paying
a large capital gains tax. 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. A good rental property
generates more income as rents go up.
Refinancing Real Estate Investments Is Better
If you refinance, you can get much of your gain out of the
property, without paying a penny in taxes. You see, 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?
Now, let's look at an example. We'll suppose you have owned a
small apartment building for several years. Let's say you bought
it for $340,000, with a down payment of $80,000. Interest rates
at the time were at 9.5%, giving 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. Your
cash flow is around $2000/month. 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 happens if you refinance?
If a bank will loan you 70% of the value, that would be
$392,000. Pay off the first mortgage, and you are left with
$172,000. You can spend it any way you want, and no taxes are
due.
It gets even better, especially when interest rates are low. If
the new interest rate is 6.5%, your new payment will be $2295.
In other words, you get $172,000 to spend any way you want, and
you still have over $1,800 cash flow each month, 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 $122,000 left
over to spend any way you want, AND have higher cash flow than
before! Isn't that sound better than selling your retirement
plan? When you want that cash, consider refinancing real estate
investments.
About the author:
Steve Gillman has invested in real estate for years. To learn
more, get a free real estate investing course, and see a photo
of a beautiful house he and his wife bought for $17,500, visit
http://www.HousesU
nderFiftyThousand.com
