Refinancing vs. Selling a Rental Property

Refinancing vs. Selling a Rental Property

Making the Right Choice for Your Financial Goals


Given that the federal government is increasing the capital gain inclusion rate, particularly for people who own their rental portfolio in a corporation, some real estate investors are wondering if it is worthwhile to sell at this point. Some may have decided to wait it out until the next government comes into power (fingers crossed).

As we all know, real estate equity is great, but you can’t eat the real estate equity. If you need to tap into the equity and feel that it’s not possible to sell the property before June 25 (the effective date of the increased capital inclusion rate), and don’t want to pay the extra tax, what are the other alternatives?

Refinancing can be your answer to the solution.

Understanding Your Goals:

Before I dive deeper into the qualitative considerations, the first step is to start off with understanding your goal and your primary objective for why you want to sell.

You might want to sell because you would like to diversify your investment portfolio—maybe move your investment to the United States.

You might want to sell because you hate being a landlord.

You might want to sell because you want to lower your debt servicing cost monthly, as you can no longer afford to pay for the mortgages.

Whatever your reason may be, the first step is to understand your why. Without knowing the why, it’s difficult to analyze numbers.

Overview of Refinancing:

Refinancing means replacing your existing mortgage with a new one, usually to get better terms or access the equity in your property.

Pros of Refinancing:
  • Access Equity: You can tap into the equity you’ve built up without selling the property.
  • Lower Interest Rates: If interest rates have dropped since you took out your original mortgage, refinancing could save you money on interest.
  • Improved Cash Flow: Lower monthly payments can free up cash flow for other investments or expenses.
  • Tax Benefits: Interest on your mortgage is tax-deductible.
Cons of Refinancing:
  • Closing Costs: Refinancing involves closing costs, which can add up.
  • Extended Loan Term: You may end up extending the term of your mortgage, meaning you’ll be paying it off for a longer period.
  • Qualification Requirements: You’ll need to qualify for the new mortgage, which can be challenging if your financial situation has changed.  Some investors are simply unable to get financing.  Some, however, would need the capital to renovate the property so that they would be able to increase the rental income, and in turns, increase their ability to borrow more.  
  • Higher carrying cost: When you refinance the property, you’re essentially borrowing more money from the bank.  When you owe more money, the mortgage payment is higher.  Do you have sufficient rental income to cover the increased debt service cost?  If not, do you have the plan to increase the rental income in the future?  These are the questions I would ask myself before making a decision.

Overview of Selling:

Selling your rental property means listing it on the market and transferring ownership to a new buyer.

Pros of Selling:
  • Liquidate Equity: Selling allows you to cash out the equity you’ve built up.
  • Diversification: You can use the proceeds to diversify your investments.
  • Eliminate Debt: Selling pays off your mortgage, freeing you from monthly payments.
  • Simplify Portfolio: Reduces management responsibilities and potential headaches associated with being a landlord.
Cons of Selling:
  • Capital Gains Tax: You’ll need to pay taxes on any profit you make from the sale.
  • Transaction Costs: Selling a property involves real estate agent commissions, closing costs, and possible repair costs.
  • Market Conditions: The real estate market can be unpredictable, affecting how quickly you sell and at what price.
  • Lost Rental Income: Once sold, you’ll lose the ongoing rental income from the property.
Key Factors to Consider:
  • Financial Goals: What are your long-term financial objectives? Do you need immediate cash, or are you looking to grow your portfolio?
  • Market Conditions: Are property values rising or falling? Are interest rates favorable for refinancing?
  • Tax Implications: Understand the tax impact of both selling and refinancing. Consult with a tax professional to make an informed decision.
  • Future Plans: Are you planning to reinvest in real estate, or do you have other investment opportunities in mind?

Real-Life Example:

Let me share a quick example from my own experience. We faced a similar decision with one of our rental properties. After evaluating our financial goals and market conditions, we chose to sell. This allowed us to access equity, reduce our monthly payments, and reinvest in another property, ultimately growing our portfolio.

Here’s an example using numbers:


Both refinancing and selling have their advantages and disadvantages. The best choice depends on your unique financial situation, goals, and market conditions. Always consider consulting with a financial advisor or real estate professional to make the most informed decision.

Until next time,

Cherry Chan, CPA, CA

Your Real Estate Accountant

Related Posts
1 Comment
joe maio

hi there…..i am looking to get a book on real estate accounting and tax., as I want to digest all the videos and info sent to me. Great info.

Comments are closed.