Refinancing Rental Property

Refinancing 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 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.