May 24, 2024


Mad about real estate

Refinancing Property Investments

Why should you consider refinancing real estate investments instead of selling them?  Perhaps you have owned a rental property for a long time you have cleared the mortgage, the value is up, and you wish to cash in on that equity.  You may do better to refinance.  Here’s why.  

There are 2 Problems with selling.  First, selling means paying an enormous capital gains tax.  You can avoid this if you reinvest through a 1031 exchange, but then the point is that you would like your money, right?  2nd, you will be giving up your inflation-indexed retirement plan.  A good rental property generates more earnings as leases go up.  

Refinancing property 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 isn’t 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 imagine 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.  Rates at the time were at 9.5{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4}, 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 does one get at some of that equity?  If you sell, you may give up the revenue, AND pay a large part of the profit in taxes.  What occurs if you refinance?  

If a bank will loan you seventy percent of the value, that would be $392,000.  Clear the first mortgage, and you are left with $172,000.  You can spend it any way you would like, and no taxes are due.  

It gets even better, especially when rates are low.  If the new IR is 6.5{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4}, your new payment will be $2295.  To paraphrase, you get $172,000 to spend any way you would like, and you continue to have over $1,800 money flow every 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 may 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.