Refinancing Rental Property
Many people invest in rental properties as a viable source of income and a financial investment for the future. If you have purchased a rental property and have not made much profit, should you sell to take advantage of rising home values?
If you sell your rental property and do not reinvest, you will have to pay a sizeable capital gains tax. Also if you sell your rental property, you will miss out on future income—a good rental property will bring in more income as rental rates rise.In many cases, simply refinancing your rental property can make the venture more viable and let you keep your future income which will likely go up. Since you do not have to pay taxes when you borrow money, refinancing will not cost you the taxes you will have to pay if you sell.
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Questions To Ask Before Refinancing
There are many questions to ask yourself if you are considering refinancing your rental property. Perhaps the most important regards the interest rate. What is your interest rate on your present mortgage and what interest rate are you likely to have in refinancing? You will want to make sure you can really get a better deal in refinancing.
Another thing to consider is how long you plan to own your rental property. Refinancing usually is only advantageous when you will continue to own the property for a significant amount of time. If you plan to sell the property within the next three years, refinancing might not be the best option.
Finally, consider the state of the economy when considering refinancing. When the economy takes a downturn, demand for rental properties soar. Credit is harder to obtain; fewer people gain approval for mortgages and so they seek rental housing. Refinancing strategically can enable you to purchase more rental properties in a down economy and get the most from your real estate investments.
Get Professional Help
While refinancing rental properties is often a viable option, lenders tend to look at refinancing investment properties more skeptically than they do in the case of primary residencies. There can be many hassles to refinancing your rental property. There are also difficult questions, such as whether it would be beneficial to you to use equity from a refinancing to make improvements to your property and then raise the rental rates. You may want to consider working with an independent financial adviser to help you navigate this process.Image Credit: woodleywonderworks, Flickr