Instead of selling real estate investments, why should you consider refinancing them? You may have owned a rental property for years and you want to cash in on that equity because you have paid down the mortgage and the value is up. You will do better to refinance. Why is that?
In selling, there are two problems. First, paying a large capital gains tax is what selling means. If you reinvest through a 1031 exchange then you can avoid this but then the point is, you would 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
You can get much of your gain out of the property if you refinance and you don?t have to pay a penny in taxes. In fact, it is not a taxable event to borrow money. You can still keep your rentals even if you take your loan proceeds and spend them any way you want. That does sound better than losing a big chunk of your equity to taxes, doesn?t it.
Let?s now look at an example. Perhaps a small apartment building is what you have owned for several years. What if you bought it for $340,000 with a down payment of $80,000? 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).
Now, the property is worth $560,000 and you owe $220,000. Your cash flow is around $2000/month. Question is, how do you get at some of that equity? If you sell, you will pay a bit part of the profit in taxes and you will also give up the income. But if you refinance, what happens?
If a bank will loan you 70% of the value, that would be $392,000. You are left with $172,000 if you pay off the first mortgage. There are no taxes due and you can spend it any way you want.
When interest rates are low, then it gets even better. Your new payment will be $2,295 if the new interest rate is 6.5%. In other words, you still have over $1,800 cash flow each month from an inflation-indexed retirement plan and you get $172,000 to spend any way you want.
An even better scenario is this one. For high-return upgrades to the property such as carports and a laundry room, spend $50,000 of the loan 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. That does sound better than selling your retirement plan, doesn?t it. In case you want that cash, then refinancing real estate investments is what you should consider.
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Source: http://bestmortgageratetips.info/blog/2012/02/23/how-to-refinance-real-estate-investments/
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