All Forum Posts by: David Beard

Hi, Scott -- can you clarify, as saying "portfolio lending" and "FNMA" in the same breath seems a bit confusing. Are you saying that the portfolio lenders simply underwrite to FNMA standards but don't resell? How long of a fixed rate term will your "portfolio lender" go?

Are you also saying that rental income can only be used for qualifying if it appears on your tax returns for 2 years? IOW, you can't use the rental income from your subject property on a purchase, even if leased?

Thanks.

It almost goes without saying to locate a good CPA (should automatically display when the word "tax" appears in a question), but bear in mind that many accountants have a broad clientele and can get watered down on their specific knowledge of REI tax strategies, as well as taking the easy path due to time constraints to research issues).

It is imperative that you educate yourself and raise these issues with your CPA. There are good books from NOLO and Lasser, among others.

Often missed: Accelerated depreciation of personal property and land improvements (appliances, window coverings, awnings, carpeting, landscaping, driveways, walkways, and fencing)
* More favorable determination of land/structure pro-rations than from tax assessor.
* Mileage looking for properties in your rental area (where you already own properties)
* Home office deduction
* Many more.. so educate yourself.

A very common dilemma, no doubt, especially with rates so low for buy-and-hold, but all this distressed inventory to flip! The amount of cash flow you need from your REI business to live on (or want to be able to live on) is of course a key determinant as well.

I do think it makes sense to divide your funds and work both businesses. You will establish a resume and track record of success in both areas that will facilitate the attraction of private money partners. At that point your universe of options will be wide open.

Also, you can do leveraged buy-and-hold deals all day long at 40-50% ROI, given these low rates and generous cap rates on beaten down prices. Compound that return for a few years and you've got some real wealth. And add on rent hikes, good expense mgmt, and a bit of capital appr as gravy (if it comes), and you're on your way.

Buy your underperforming apartment at a very very attractive price (duh), manage it well and exchange into another twice as large, that just needs your management excellence, in a few years. Meanwhile, maintain enough funds to do at least 2-3 flips per year, being very selective.

Yes, ditto on the congrats! Give us some details on your purchase price and estimated rehab expenses.

Best of luck!

The flippers here can answer the first part. Serial flippers are often "dealers" and use Sch. C. Incidental sales could be a ST cap gain, but would still be at ordinary income tax rates. A key differnence is that dealers are subject to self-employment taxes. There are fact and intent rules around dealer determination.

On the rental, if your friend and you do not have a formal partnership agreement or other business entity (i.e. you're just co-owners), then you apportion the results between your two Sch. E's and specify the percentage that you own on each of your Sch. E's.

This would not be deductible. You can only deduct things you actually spend money on (ie. the cost of the sign itself). That's why your personal labor in doing repairs is not deductible.

You can deduct your mileage at the .50/mile rate when you're driving related to your business. Perhaps your question is: can I deduct my personal mileage when displaying this sign on my car, since I'm constantly fostering my business? Again, the IRS would no doubt say no. Lots of people have marketing of some sort adorning their vehicles, so it would be silly to think you can take a deduction for slapping a sign on your car.

I agree it doesn't make sense that no property tax is reflected on Sch. E. This should be picked up for the current year's tax, even if it was prepaid the prior calendar year for some reason.

The Sch. E certainly can be fabricated, if you don't get a copy from either the IRS (this is what lenders often do, but unlikely the seller will give you this right), or from their accountant directly (assuming they don't do their own taxes).

I've since found out that US Bank will go to 6 financed properties, at least in my area, and I have a loan in process with them.

Here's a few more pieces of info I've picked up lately:

If you want to use any of the rental income for qualifying in debt ratio calcs, you'll need the following with US Bank (they follow Freddie Mac guidelines, I believe Fannie Mae is very similar so this should be generally accurate across the board):

* 2 years experience owning 1-4 unit properties as documented on Sch. E of tax return
* Signed leases
* An income appraisal
* 6 mths rent loss insurance
* A detailed operating income statement pro-forma of expenses and replacement reserves that must be signed off by appraiser and underwriter. This backs out assumed expenses for prop mgmt and maint/repairs even if you do this work yourself.

If you don't adhere to this, the rental income won't count, and the PITI of the property (and potentially operating expenses as well) will be added to your obligations (numerator) in the debt ratio, which is very punitive. If you do meet these guidelines, then any positive net rental income (NOI minus vacancy factor minus replacement reserves minus PITI) is netted in your income (denominator).

The experience item is one that you either have or don't. Community bank portfolio lenders can be more flexible in recognizing compensating factors, but unfortunately the conventional loan "bullets" have to be used first, as the financed property limits apply to ALL loans you have on 1-4 properties, and only conventional financing will get you the 20-30 year fixed rate terms that most investors would love to get at thist time.

One caveat is that commercial loans on 5+ unit properties do not count toward these financed property limits.

Once you get beyond the 4th loan, they'll look for a 740 credit score, 6 mths cash reserves for PITI on your subject property plus all other rental properties owned, and max LTV falls from 75% to 70%. You can use your 401-K account to support cash reserves (they may make a tax-related adjustment )

Organize your data in a professional manner when submitting to underwriters, as this will help and there is some subjectivity involved, such as if you're trying to explain why a large repair bill on your Sch. E should be adjusted out as an exception item, or if you had large vacancies for a particular reason.

If anyone disagrees with any of this, please let me know and I'll happily stand corrected, but I tried to gather this data in order to map out financing strategy and loan sequencing for building a buy-and-hold portfolio. Of course, once you hit loan #10 on 1-4 unit properties, you're clearly done with the conventional route but should have excellent documentation on your portfolio properties to work effectively with your community bank lender.

Is anyone buying used furnaces, heat pumps, and such from large heating & air companies? So many folks are upgrading to high-efficiency at their residences these days due to the available tax credits, that lots of quality used HVAC equipment would seem to be out there.

I recently was considering upgrading my heat pump and asked the HVAC contractor what they do with older stuff that still has quite a bit of life, and he said they sold them for a small amount to a good-sized rental property firm in our area.

Yes, all the housing agencies (fannie, freddie, FHA/HUD) have owner occupant "first look" periods. I'm sure they view this as consistent with their mission of fostering home ownership.

There is also a standard deed restriction with fannie indicating you can't resell for more than 20% above what you paid for 90 days. Also 90 day title seasoning, meaning that you'll need to be on title for 90 days prior to accepting a contract from a buyer who will be getting conventional financing.

I believe it's safe to say that they can enforce all of this.