How to make cash flow available through refinancing
Not everything in property investment is about the cash flow generated from rental income. There is another leg to your returns that often dwarfs the cash flow generated from rental income minus your outflows: The capital growth or equity in a property.
You can access this capital growth or equity by selling your property at a higher value than you purchased it. This, however, incurs costs such as agent commissions, bond cancellation fees and capital gains tax.
Or you can refinance, which allows you to access the capital growth in your property and keep the property. Refinancing is to finance something again, typically with new loans at a lower rate of interest. The beauty of this strategy is that the refinanced funds are accessed tax-free since you don’t pay tax on refinanced money.
Keep these five points about refinancing in mind:
1) BUY BELOW MARKET VALUE
If there is no equity, you cannot refinance. Your property must be worth more than the debt on the property to refinance. One of the best ways to achieve this is to buy the property below market value. In one of our previous articles, Ready, Set, Negotiate, we discuss why someone would sell a property below market value.
2) UPDATE YOUR ADMIN
When you refinance, banks request the latest annual financial statements of the entity that holds the property, up to date lease agreements and information about your finances. Have all this documentation in place.
3) LOOK AFTER YOUR CREDIT SCORE
Without an excellent credit score, it becomes challenging to refinance. We discussed this in more in the following article, 5 Ways to Finance your Properties.
4) USE YOUR ACCESS BOND TO STORE YOUR REFINANCED FUNDS
Once you have refinanced your property, immediately put those funds in your access bond to avoid paying unnecessary interest. When you refinance, your monthly bond payment could increase, but while your funds are in the access bond, it could reduce the monthly bond payment. You can read more about how to use your access bond in the following article, Start Using Your Access Bond Today.
5) KEEP SUFFICIENT CASH RESERVES
Do not spend all your refinanced funds on expanding your portfolio or settling other debt. Even though you now have capital available, make sure to keep an emergency fund in one of your access bonds. I always keep 10% of the value of my properties as cash.
And there you have it. If you want to free up cash or grow your property portfolio, refinancing is the way to go!