Christian Refinancing Investment Property
Christian 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.
Christian Refinancing Rental PropertyRefinancing rental property may become a viable option at a time when the owner may be seeking to sell the property off altogether. Many investors buy investments to produce extra income but somehow never see a big return that had been expected. Over time, the hassle of maintaining the building becomes burdensome and the option of unloading the investment while values are up and perhaps the balance on the mortgage has gone down is attractive. Attractive yes, but perhaps not a wise business move. So many people make life decisions based on what they think is right, unaware or not caring about God's opinion and instruction. Jesus reminds us that ignorance of biblical truth causes us to make grave mistakes saying, "...Ye do err not knowing the scriptures nor the power of God." (Matthew 22:29)
When a person decides to sell rather than refinancing rental property there are big tax issues that come into play. These are the capital gains taxes that Congress has argued about for years and have to do with taxing the profits investors make on real estate, stocks and other transactions. If the profit on selling an investment dwelling is used for personal use such as college expenses, a new car, vacation, etc., then capital gains taxes will come into play. On the other hand, if refinancing rental property is not chosen but rather selling is the choice with a 1031 exchange, no capital gains liability will be realized. In simple terms, a 1031 exchange is just selling one rental property in order to buy another.
Is the only option for making money on a slow moving investment dwelling selling it? Well, just as personal homeowners can take equity out of their house through a home equity loan and use the money for personal use, an investor can choose the option of refinancing rental property and use much of the money for personal use if desired. Borrowing money is not something that can be taxed. Capital gains will only come into play when the property is actually sold. The investor is free to use the money for other investments, improvements on the existing building(s) or for any other project the owner deems important.
Now there is something to think about in all this refi talk going on. If there have been a number of changes in the investor's financial life between the time of the initial purchase of the investment dwelling and the present time of contemplating the refinancing rental property possibility, there could be a potential snafu to the whole idea. For the small investor, the personal credit score is the all important trigger that launches approval for new borrowing power. If there have been late payments or maxed credit cards reported on one's credit history, the score of the investor will take a tumble, perhaps even out of consideration for new borrowing privileges. Owning and paying on the rental property mortgage isn't a slam dunk for refinancing rental property, even the same buildings if credit has been damaged.
So what are the questions an investor should ask himself before refinancing? The most important would be what is the interest rate on the present mortgage and what rate can I expect to receive on the refi? Additionally, the total costs of refinancing the dwelling must be weighed over against possible gains in pulling out equity or against savings with a lower rate. Of course the length of time anticipated in holding the property would also come into play. Refinancing rental property but only planning to keep it another three years might be unwise unless the interest is at a much lower rate or cash out mortgage is employed. Finally, the time value of the investor's money must be considered. In other words, with ever increasing inflation and devaluation of the dollar, money today is worth more than it will be ten or twenty years from now and the challenge is to figure out how getting a new mortgage might play in that scenario.
The wise investor will choose economic hard times to buy distressed and low valued buildings and dwellings to build a portfolio that will take them into a comfortable retirement. When credit is harder to obtain, home sales plummet but apartment and rental residence demand soars. It is during these times that an investor who has built a portfolio stable of rental properties will do very well. This can be accomplished by the right plan of strategic refinancing rental property and using the equity out of cash out mortgages to buy other rental dwellings. And the tighter the market becomes for this kind of housing, the more money a landlord can charge, increasing his cash flow quite nicely.
Now one question that a small Christian investor might have is the decision to refinance rental property to pay off a personal home wiser than perhaps taking investment equity from a refi and making improvement in order to up the lease price, or even to buy more investments? At this juncture, a person would need to sit down with a financial advisor or a tax expert and really crunch the numbers. There is far too much at stake money wise to just guess or use conjecture. Refinancing investment property such as rentals is always tougher because it is not a primary residence. All loan institutions will look harder at all the details of the lending request for the refi of investment dwellings and a person should prepare for extra hassles in the process.