Refinancing Real Estate Investments

Refinancing Real Estate Investments
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.
Refinancing Real Estate Investments Refinancing Real Estate Investments Reviewed by Henda Yesti on August 23, 2018 Rating: 5

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