Don't Sell - Refinance that Rental Property

You've owned a rental property for years, and never seen the "big pay-off." Is it time to cash in on your investment, now that you've paid down the mortgage, and property values are up? Maybe not.

The Problem With Selling

Sell, and you'll have to pay a large capital gains tax. This could be avoided by reinvesting through a 1031 exchange, but the point is that you want your money, right? Also, a good rental provides more income as rents go up. Do you really want to lose this inflation-indexed retirement plan? What's your alternative?

Refinancing Rental Property

Consider that if you refinance, you can get much of your gain out of the property, and not pay a penny in tax. Borrowing money is not considered a taxable event. Take it and spend it however you want, and still keep your rentals.

Here's an example: Suppose you've owned a small apartment building for many years. You originally paid $240,000, with a down payment of $40,000. Your mortgage payments are $1650 monthly on the balance. Now it's worth $400,000, you still owe $120,000, and your cash flow is $800/month. How do you get at that equity without selling or losing your cash flow?

A bank will loan you 70% of the value, or $280,000, so after paying off the first mortgage, you're left with $160,000. With today's lower interest rates, your payment on the new mortgage will be about the same. At most you might lose $100/month in cash flow.

Here's an even better scenario: Use $40,000 of the money for high-return upgrades to the property, such as carports or laundry rooms, and then raise the rents. You'd have $120,000 left over to spend any way you want, and have even higher cash flow. Doesn't that sound better than selling your retirement plan? Just refinance that rental property!

To get a higher appraisal before you refinance that rental property, read the article on how to increase the income of your rental properties.