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Real Estate Investing Course - Lesson Twelve
Suppose you own a rental property for years, and want to see the "big pay-off." Is it time to cash in on your investment, once you've paid down the loan, and values are up? Maybe, but not by selling.
The Problem With Selling
Selling means you'll have to pay a large capital gains tax. This can be avoided if you reinvest through a 1031 exchange, but then the point is that you want your money, right? Also, a good rental gets more income as rents go up. Do you want to lose this inflation-indexed retirement plan? What's the alternative?
Take Out That Equity
With a new loan, you can get much of your gain out of the property, without paying a penny in taxes. Borrowing money is not a taxable event. You can take it and spend it however you want, and still keep your rentals.
Let's look at an example. Suppose you have owned a small apartment building for years. You bought it for $240,000, with a down payment of $40,000, and payments of $1650 monthly on the balance. Now, years later, it's worth $400,000, you only owe $120,000, and your cash flow is around $800/month. How do you get at that equity?
A bank will probably lend you 70% of the value, or $280,000. After paying off the $120,000 you owe, you're left with $160,000 tax-free, to spend any way you want. With today's lower interest rates, your payment on the new mortgage might even be the same, meaning you won't lose any cash flow.
Use $40,000 of that $160,000 for high-return upgrades to the property, such as carports or a laundry room, and then raise the rents. Now your cash flow is even higher than before, and you have $120,000 left over to spend any way you want. Does that sound better than selling your retirement plan? Don't sell. Just get at that equity!
Steve
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