When you refinance properties for profits or payment reduction, you make money.Refinance properties at the right time, when the real estate market is up. Refinancing is the most important investing moment after buying. To refinance properties you have to have a nice equity in your investment. Assume you bought an investment and already made your instant equity. The instant equity is the difference between retail market price/value and what you agreed to pay for it. For more information see
Buying investment properties,
There are three main tactics:
The equity is building up automaticaly, because you pay your mortgage and also over time the apreciation and inflation make equity number bigger. Folowing my advice to refinance up to 70% of the new apprized value, you are on the safe side.
Realizing Profits - ExampleAssume you purchased an apartment building five years ago for $200,000, with an $40,000 down payment: $10,000 your cash, a note to seller for $30,000 simple interest for three years and a bank mortgage for $160,000 (an 80% loan to value mortgage).
After five years you paid the note to seller, you owe to the bank $140,000 and the market value of the property is now above $300,000. You could sell the property, take your gain $140,000 and pay reduced capital gain taxes - probably up to 15% until 2010, unless extended further by a future Congress. On the other hand, you may feel that the property is still worth retaining for income and further appreciation. You would like to realize some of the gain and get back your original investment.
If the lender agrees that $300,000 is now a fair market value, the loan might be increased to $210,000 (70% loan to new value). At closing you get a check for about $50,000 (less points, appraisal and closing cost). There are no income taxes on the money you receive from refinancing, since all you are doing is borrowing money using the property as collateral/security. You may defer taxes on capital gain forever using a 1031 exchange - buy a bigger real estate income property or land, not a residence - or keep the property for life. The accounting base value for the apartment building changes to now- current market value. The heirs will not pay any capital gain if they decide to sell at that time.
The "get rich fast" and the latest - ten years - intense real estate marketing for "no money down" deals, spread also the misconceptions:
The damage is already done and the real estate "noise" is getting stronger due to more sophisticated marketing tricks available: mini movies, acting announcer, free downloads full of nothing, promising that the next download will give you the knowledge of making a six figure income, for a price of a large pizza, etc. The point is: the marketing tools are not bad, but some current web sites content. To help you, my visitor, with value content I created a special page,
Links Exchange,
where you will get good sense advice.
Three Good Reasons Not to Over-finance Your Properties1. You can’t “dump” properties in an emergency. I get calls from landlords in this position literally every day. Like from a guy who paid $78K (full value) for a rental last summer and got a purchase money loan for $76K. Now his tenants are driving him crazy and destroying the place, and he wants to sell NOW. He can’t sell to an investor, because he’s over-leveraged, and can’t sell to a homeowner, because his tenants have destroyed the house. Or from the lady who bought a $100,000 duplex for $59,000...but then got a 2nd mortgage for another $50,000. She took cash out, spent it, and now can’t afford to sell the pain-in-the-rear property 2. You can’t get consistent cash flow. I got a call yesterday from the owner of a 3 family property who got a 2nd mortgage a few years ago to take some cash out. Now the city’s on his back and he wants to sell...but the 2 payments total more than the property would gross fully rented. Unless HE pays off the 2nd of $20K, he won’t be able to sell. 3. You’ll pay an arm and a leg in the long term. Check out the difference in total interest payments between a property financed at 80% of it’s value vs. 100%, and you’ll see what I mean. There’s nothing wrong with having no money in a property—as long as your total debt is less than 80% of the retail value. Borrowing more may make you feel richer in the short term, but it’s a recipe for disaster. Reprinted from the Real Deal, a monthly newsletter for Real Life Real Estate Investors with permission of Vena Jones-Cox. Get a free 3-month trial subscription by logging onto www.regoddess.com
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