Refinance Rental Property – Don’t Sell It

You own a rental property for years, and never see the “big
pay-off” Is it time to cash in on your investment, now that
you’ve paid down the mortgage, and values are up? Maybe not
The Problem With Selling
Selling means you’ll have to pay a large capital gains tax This
can be avoided if you reinvest through a 1031 exchange, but then
the point is that you want your money, right? Also, a good
rental gets more income as rents go up Do you want to lose this
inflation-indexed retirement plan? What’s the alternative?
Refinancing Rental Property
Have you considered that if you refinance, you can get much of
your gain out of the property, without paying a penny in taxes?
Borrowing money is not a taxable event You can take it and
spend it however you want, and still keep your rentals
Let’s look at an example Suppose you have owned a small
apartment building for years You bought it for $240,000, with a
downpayment of $40,000, and mortgage payments of $1650 monthly
on the balance Now it is worth $400,000, you only owe $120,000,
and your cash flow is around $800/month How do you get at that
equity?
A bank will probably loan you 70% of the value, or $280,000
After paying off the first mortgage, you are left with $160,000
With todays lower interest rates, your payment on the new
mortgage will be about the same At most you might lose
$50/month in cash flow
An even better scenario: Use $40,000 for high-return upgrades to
the property, such as carports or laundry rooms, and then raise
the rents You could have $120,000 left over to spend any way
you want, AND have higher cash flow Does that sound better than
selling your retirement plan? Don’t sell Refinance that rental
property!

Tags | carports, exchange, gains, inflation, laundry, money, mortgage, property, refinancing, rental, rents, result