Refinancing Investment Property
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Refinancing investment property can be a smart move in many cases for the cash strapped investor needing fresh capital for new investment purchases. A re-fi can also be a wise move when the investor needs to improve the rental investment already owned in order to justify higher rental leases. In many instances, refinancing investment property is better than selling the asset outright because of tax liability issues. That may be counter intuitive, especially when a rental asset is not paying off the way the investor had hoped. But there are several real benefits to keeping the asset and making its equity work for the investor.
During times of economic upswings, the money for housing is usually cheaper and more plentiful, making home ownership much more affordable. When times slow down money tightens up and in some cases dries up and the dream of owning a home also fades, making rental assets extremely important to the economy. During these dry times owning rental assets can be a real financial boon and in many cases a money maker instead of a money loser. Rents can be raised and less attention can be paid to the minor improvements that could be made but are not necessary to rent the asset at ideal rates. During economic slowdowns the strategy of refinancing investment property already owned to buy more of the same is an attractive choice.
If the assumption is made that a rental asset is really a dog and not doing well, then the question the rental owner must ask is why. In good economic times when buying a home is more popular than renting an apartment, the owner must face the possibility that the rental asset is unattractive or not conducive to long term renter loyalty. Of course, having sustained renters in an investment asset is the absolute pinnacle of an investor's dream. Constant turnover leads to the asset being abused and can often spell trouble in having abusive or delinquent renters removed. But renters who love where they live and recognize that their lease is a good deal are a win-win for both owner and lessee. So in good economic times, the action of refinancing investment property and then taking the extra cash to fix an asset up and increasing amenities such as laundry rooms or carports can very much enhance lease possibilities. A re-fi then, in a time when buying one's own residence is more affordable and more attractive than renting a less than quality apartment, can really improve cash flow.
Refinancing investment property is often a much more financially sound options than selling because of the dreaded capital gains taxes that may have to be paid. If the motive for selling a property entirely is to make a profit, there will be capital gains taxes paid on any increase in value the property has made since the last sale. Through 2010, long term capital gains taxes are 10 and 15 percent for those in the lowest two tax brackets and up to 35% on high income investors. So as much as thirty five percent will be taken for any profits made on investment property if sold outright. But refinancing investment property can still mean that profit can be taken out of the property but not taxed. Borrowing money is not a taxable event.
If an investor decides to take a cash out mortgage on an asset and use it for purchasing other property or making improvements on the existing one, there are no tax liabilities. In fact the money borrowed may be deductible as expense, but a tax attorney should always be consulted in such situations. The capital gains tax only comes into play when the asset is eventually sold. Jesus did not come to bring peace into the world as in an absence of war, but into men's hearts in the midst of trouble. "Peace I leave with you, my peace I give unto to you; not as the world giveth, give I unto you. Let not your heart be troubled, neither let it be afraid." (John 14:27)
If a cash-out mortgage is not a refinancing investment property option then a home equity loan on the investment property may be the next best recourse. A home equity loan is only available in a variable rate and not a fixed rate interest transaction. In most cases the bank or lender will only fund sixty to seventy percent equity of the property's appraised value. For example, a house appraised at one hundred thousand dollars with twenty thousand dollars in equity will not be eligible for more than a fourteen thousand dollar home equity loan. The attractiveness of a home equity loan is in the fact that the interest on the loan may be deductible as a business expense.
If there is any kind of caution in this whole refinancing investment property discussion, it would be in the investor's current financial situation. Since first buying an investment property, an investor may have made some unsound personal decisions such as running up a lot of personal credit, maxing out charge accounts or perhaps having late payments on debt obligations. If lending institutions tighten up requirements on lending qualifications, it may be possible that an investor could not get a re-fi loan under normal conditions. It may mean that the owner may have to put up his own personal residence as collateral or may have to seek a hard money lender as an alternative cash resource. In any case, just owning the investment should not be assumed to be the green light in getting new loan money tied to it.
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