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Refinance Rental Property - Don't Sell It

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                    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!




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