Refinancing vs Selling as a Property investor

Refinance

 

Pros

• No tax on the debt gained – As the money you pull out through re-financing is a debt then it has no tax applied, so this means no corporate or capital tax which can be 18% +

 

• You keep the property – As you are not selling the property you continue to keep the income stream.

 

Cons

• You owe money on the debt - In a recession for example the interest rate could grow, this combined with a low occupancy, you could be in a scenario where lack of income and high interest rates you are no longer creating a monthly income margin.

 

• Not ideal for a non-professional property investor – If you do not spend the time growing your portfolio then this may be pointless. This is technique used by professional investors, as it is (when working and done properly) is the most tax efficient and fastest way to grow your portfolio. But if you do not have the time to follow through with it (as you may have another full-time job and you may just not know as much about investing in general) then it may not work out.

 

• You will need a solid RICS valuation – Not a massive con, it will cost you a little bit, and then there is a chance the property is valued a lot less than you were hoping for. Therefore, it is ideal to do this before anything else.

 

Selling

 

Pros

• You have no debt to pay – This is good when interest rates are growing, for example in a recession. Being low geared (meaning you have very little debt to pay in loans and mortgages) is a much safer position to be in during a recession. If you own a large portfolio, it could be a good idea to sell property to pay debt off in other property. Properties could be down valued in combination with rising interest rates during recession, which could effectively put you into negative equity.

 

• The additional cash can be spent on whatever you want - Maybe you wish to enjoy the money instead of re-investing. If you spend your life working, at some point you may wish to enjoy some of your success. Although if you have a massive portfolio your income stream may be more than enough for you, but there are many scenarios where you may want the lump sum for yourself.

 

Cons

• Tax on profit – You will be subject to massive amounts of corporate or capital gains tax when selling for profit. If you are looking to re-invest in more property, then selling a property does not make much sense against re-financing

 

• Loss of income stream - Not only will you have massive tax bills when selling a property for profit, but you will no longer have the income stream.

 

Conclusion: At Fabrik Invest, we are professional full-time investors where refinancing has been key to the success of the directors.  For this reason, we are highly biased towards the strategy of refinancing. However, not everyone has the skill, education, and time to build a portfolio in this way, so selling a property may be an easy and safer option.

In addition to the above a looming recession and rise in interest rates does make a strong case for selling property assets. Ultimately it is dependent on your exact scenario.