Posted by Nate(DC) on July 31, 2003 at 20:56:22:
Just because he has never asked does not make him right.
NT
Dont sell only refinance?? - Posted by Al
Posted by Al on July 26, 2003 at 23:43:44:
Hi,
Would it be possible to create short term income through realestate by only using the “buy and hold” strategy through refinancing?
I have met a few investors who have claimed that they have NEVER had a job in their life, NEVER traded or sold properties for profits but only used “buy and hold” strategy to create income that replaced the need for a job. They claimed they have done this by refinancing. Is that possible?
The only way I can think of is by only investing on positive cashflow properties and use creative financing to close deals if one has no Job. Any other ways?
Thanks.
Kind regards,
Al
Be careful about “tax free” - Posted by Nate(DC)
Posted by Nate(DC) on July 27, 2003 at 21:55:35:
While the money you take out is tax free - i.e. it’s borrowed, so you don’t owe tax on it because it must be repaid - don’t make the erroneous assumption that the interest you pay on that money is all tax deductible.
If you borrow money against an investment property, the interest is only tax deductible as a business expense, and therefore only if the money is used for business purposes.
If you are taking on debt to purchase the rental property (e.g. put 20% down and finance 80%) that is clearly for a business purpose. If you take out money and use it to rehab the property, or buy more property, or invest in another business…those are OK.
If you take the money out and use it for personal purposes (vacation to Tahiti, kid’s college tuition, new car) then the interest is NOT tax deductible.
My accountant advised me that to ensure there is no question if ever audited, that I should keep the proceeds in a separate account that is used only for business purposes.
NT
QUESTION again/Dont sell only refinance?? - Posted by Al
Posted by Al on July 27, 2003 at 19:30:08:
I’d like to thank the people who replied back to the message that I have posted regarding " Dont sell only refinance?" In relation to refinancing being better than selling, I’m assuming that after refinancing the rent/income would still be able to cover all the expenses therefore the investor could use the money to cover the existing loan and the rest he could pocket ie tax free money and the property still has positive cashflow or at least good cash on cash return right?
The property has to have a very strong cashflow as
refinancing/increasing the loan could change the cashflow from positive to negative if it is used to release money instead of selling?
I am just about to acquire a positive cash flow property ie 2X duplex with $20 income every week. I submitted a contract with 15% discount by buying 2 (bulk), purchase price of $125,000 rent return of $280 a week. I tried to work out a plan that would give me tax free money by increasing the loan but unfortunately by just increasing the loan by $1500, I am $3 negative cashflow. Is it still worth pocketing the $1500 even if by doing so the property will now make a loss?
Thanks again.
Kindest regards,
Al
Re: Dont sell only refinance?? - Posted by Arthur
Posted by Arthur on July 27, 2003 at 12:52:24:
This is a strategy that Dolf De Roos (author of Real Estate Riches) uses.
The advantages of doing this is that any money you get from re-financing is tax free as its not a profit. If the rental income is strong, then personally i would always re-fi than sell to get 30% plus more profit, while still having a property that is being paid off by someone else.
However, i think it is unwise to spend all your re-fi money on your daily living expenses…you should spend most of it helping to finance other deals.
Re: Dont sell only refinance?? - Posted by Dan-fl
Posted by Dan-fl on July 27, 2003 at 07:26:57:
It is possible,but slow.I think you need to do both.I rehab and sell and keep some for rentals.This will build your cashflow and cash reserves.I was just posting about this the other day.Go to www.creonline.com/wwwboard/messages/80652.html
Re: Dont sell only refinance?? - Posted by Eric
Posted by Eric on July 27, 2003 at 07:20:04:
That’s an interesting question.
Robert Allen talked about a strategy like this in his “Nothing Down for the 90s’” book. Basically you have several properties and you refinance one a year or so to live off of.
It’s very risky though. As a minimum, anytime you refinance a buy-and-hold property you are robbing Peter to pay Paul because you’ve got to pay for that higher mortgage payment.
In Allen’s book I recall he used extremely optimistic assumptions about appreciating prices, rents keeping pace with your higher mortgage payments when you do this, etc. It may be possible to do this, but you have to be extremely careful. For example as I recall, he talked about doing this in San Diego in the early 1990s’ - an unrealistic market in today’s environment.
He also showed an example of doing it with just 5 properties - which to me is too few - the more properties you own toe better for this - the more control you would have over which terms you choose to refinance when. And also the more time for mortgages to season and principal be paid off before refinancing again. But it’s still risky and really not too practical.
Where you live in the country would be a factor here. It would have to be in an area of growing population, great rental demand for the forseeable future, and even then it’s risky. Also, how well you bought, your current cash flow and what financing you have are factors.
Also, Wade Cook briefly talked about this in his “real estate money-machine” books on cash flow, where he mentioned that our mentality is that we live in a monthly billing society. So most people have a harder time mentally budgeting for annual expenses than we do for monthly expenses. So he used that argument for pushing the strategies that improve your monthly cash flow vs. an annual lump-sum - for example lease-options, seller carry-backs.
Maybe someone could do something like this only as a temporary plan for just a couple of years in a market with low interest rates - or maybe use the refinances to pay for just a few, very specific lump-sum expenses in your life - for example college for one of your kids.
Re: I think you are wrong… - Posted by Rich
Posted by Rich on July 30, 2003 at 14:41:41:
My CPA has never asked me what the money is for. It may be wise to do as you suggest, but the interest is certainly tax deductable either way.