Article Body: You have a rental property for years, and never for once see the "big payoff." Is it the period to cash in on your investment, now that you've paid down the mortgage, and values are up? Maybe not…
The Problem with Selling
Selling is same as you'll have to pay a huge capital gains tax. This can be dodged if you reinvest via a 1031 exchange, but then the idea is that you need your money, right? Besides, a good rental gets more income as rents go up. Do you want to lose this inflation-indexed retirement plan? What's the alternative?
Refinancing Rental Property
Have you thought that if you refinance, you can get much of your profit out of the property, without giving a penny in taxes? Borrowing money is not a taxable event. You can take it and use it anyhow you want, and still keep your rentals.
Let's view an instance. Assuming you own a small studio apartment building for years. You bought it for $240,000, with a downpayment of $40,000, and mortgage payments of $1650 monthly on the balance.
Now it is 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 loan you $280,000 or 70% of the value. After paying off the initial mortgage, you are left with $160,000. Compare with today’s lower interest rates, your payment on the new mortgage will be almost the same. At the most, you might lose $50 monthly as cash flow.
A good scenario: Spend $40,000 for high-return improvements to the property, such as airports, laundry rooms, and then increase the rents. You could have $120,000 left over to spend anyhow you want, AND have higher cash flow. Does that sound better to selling your retirement plan? Don't sell. Refinance that rental property!