You own a rental property for years, and never see the “big pay-off.” Is it time to cash in on your investment, now that you’ve paid down the mortgage, and values are up? Maybe not.
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 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 70% of the value, or $280,000. After paying off the first mortgage, you are left with $160,000. With today’s lower interest rates, your payment on the new mortgage will be about the same. At most you might lose $50/month in cash flow.
An even better scenario: Use $40,000 for high-return upgrades to the property, such as carports or laundry rooms, and then raise the rents. You could have $120,000 left over to spend any way you want, AND have higher cash flow. Does that sound better than selling your retirement plan? Don’t sell. Refinance that rental property!