Refinancing Real Estate Investments
Below is a MRR and PLR article in category Finance -> subcategory Real Estate.
Refinancing Real Estate Investments: A Smarter Choice
Refinancing your real estate investments, particularly rental properties and apartment buildings, often makes more sense than selling them. Here's why.
Why Refinance Instead of Sell?
If you've owned a rental property for a while and it's increased in value, refinancing can be more beneficial than selling. While selling might seem like an easy way to cash in on equity, it comes with drawbacks.
Problems with Selling
1. Capital Gains Tax: Selling means paying significant capital gains tax. Although a 1031 exchange allows you to reinvest and defer taxes, it doesn't provide immediate cash access.
2. Losing a Retirement Asset: A well-managed rental property can serve as an inflation-protected retirement plan, generating increased income as rents rise.
The Advantages of Refinancing
Refinancing allows you to access your property's equity without the burden of taxes?"since borrowing isn’t a taxable event. This means you can use the loan proceeds freely while retaining your rental property.
An Example Scenario
Imagine you purchased a small apartment for $340,000, with an $80,000 down payment. Initially, you secured a 9.5% interest rate, resulting in a $2,106 monthly payment on a $260,000 balance.
Fast forward, and the property's value has risen to $560,000, with your mortgage now at $220,000. Your monthly cash flow is around $2,000. If you sell, you'll lose income and face hefty taxes. But if you refinance, here's what happens:
- A bank loans you 70% of the property’s current value?"$392,000.
- After settling the original mortgage, you're left with $172,000 tax-free to spend as you wish.
Enhanced Benefits with Lower Rates
If interest rates drop to 6.5%, your new monthly payment would be $2,295. This means you’d pocket $172,000 and still enjoy over $1,800 in monthly cash flow.
Further enhancing your investment, you could spend $50,000 on high-return property upgrades like carports or a laundry room. This could boost your rental income, leaving you with $122,000 in hand and greater cash flow.
By refinancing, you preserve and potentially enhance your investment's value, providing a robust alternative to selling. When you need cash, consider refinancing your real estate investments.
You can find the original non-AI version of this article here: Refinancing Real Estate Investments.
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