All Forum Posts by: Daniel Dietz

@Catherine Peters, even thought conventional is usually the way to go, there are other reasons.

Some of ours are held by a 3 way LLC, and LLC loans typically have to be non-conventional. I think that holds true even for a single member LLC, but am not sure.

Another reason is DTI ratio's. In the commercial lenders world, they dont really care about that, as long as the numbers make sense. They are usually looking for a DSCR (that shows up on the BP Rental Calculator) of 1.20 or better. They also, if you have some experience with land-lording, count 100% of expected rents less a vacancy factor (5% in our case).

Also, now that we have done a few with them, will let us put down 10% of our own money and mix that with 10% (or more) from a seller carry or private lender. I *think* that would kick in PMI on a conventional.

But one of the biggest things is the ease of the process. I was at a property auction a few months ago, ran the numbers on my phone on the BP Calculator and came up with a DSCR of 1.4 - very solid. Called my banker, and said "Im thinking 90K max bid, here's the rent, I have this much down, can we do this?" Without hesitation he said yes as long as the appraisal come in OK (I knew it would) We did not get the bid on that one, but if we had we would have needed to put 5K non refundable earnest money down THAT day -..... you want a lender that is simple to deal with :-)

Good luck, Dan Dietz

@Catherine Peters in our area we can get commercial loans with 20% down, 5.125% amortized over 25 years with rate locked for 10 years. After 10 years it can go up a max of 1% per year to a max of 11.125% Now that we have done a couple with them, we can do 10% down of our own funds if we find an owner or private lender that is willing to do the other 10%. We can do these for anything from a SFH that is non owner occupied up to 5M dollars.

Dan Dietz

Hello All, 

I just want to touch on how 'rental income' can ALSO help with lowering other taxes too. 

Lets way you have 25 units and after all of the 'real expenses' that you get to right off (compared to capital expenditures that you need to depreciate) like taxes, insurance, interest, small repairs, property management etc..... you have 30K of 'net income' that is taxable BEFORE depreciation.  

Now on those same 25 units you get to write off 50K of depreciation each year, for about 27 years I think it is. You just lowered your 'profit', at least for tax purposes, from +30K to -20K that can carry over to your personal taxes. 

Now go over to your taxes from your W-2 or in my case K-1 since I am self employed. Let's say at my 'day job' I have a taxable income of 50K. I get to take that -20K loss from my real estate and deduct that from my 'regular income' of 50K and end up with total taxable income of 30K, when in reality I had a total income, before depreciation, or 80K. It is like getting 50K tax free. 

In my case, since I am self employed I need to cover both halves of SSI, federal and state taxes which add up to about 35%. So that depreciation saved me about 18K in taxes! 

Overall I look at the profits from rentals as about 25% from 'cash flow', 30% from principal pay-down (25 year notes), 30% from appreciation (figuring 2%), and 15% from 'tax savings'. 

So it is correct that most people dont invest BECAUSE of the tax benefits, it certainly can add up over time. 

Dan Dietz

Hello All, 

Any other thoughts on what might be most beneficial to the seller in this case? I have mostly spent my time understanding the 'buying side' of things since that is the phase that we are currently in. I know there has to be some good tips out there from those who have been on the selling side in this situation :-)

Thanks, Dan Dietz

@Tom S. I forgot to mention that part :-) Our portfolio lender that we use will lend up to 80% LTV and the other 20% can be a combination of our down (they like to see 10%) and a second that can be either the seller or a private lender, as long as the numbers still make sense.

At this point in time, I want to stretch my capital as far as practical when I find the right deals and can lock them in while rates are still low. I am mainly looking to create as much cash flow and equity as I can at a point 10-15 years down the road when I retire. To me, that is a bigger concern than current cash flow now.

Thanks, Dan Dietz

Hello All, 

I have found a local landlord that is getting up there in age and wants to ease out of being a landlord. He has 7 out of 10 of his duplexes left that are all in very good shape and fit our investing criteria as far as rent-to-price ratio goes. He IS open to maybe doing some kind of Seller Financing IF it is beneficial to him financially. 

One of his concerns is the taxes that he would have to pay when he sells. I do not think he really needs the money for income since he has a pension, SSI, etc.... He stated on the last one he sold for about 150K that his tax bill was about 20-25K between deprecation recapture and capital gains goes. He would like to minimize that, as he sees it as 'money down the drain'.

I believe on average he might have about about a 50K balance on a house valued at 150K, meaning he might 'net' about 100K before paying taxes.

My one thought of what *might* be beneficial to him tax wise would be if we got a bank loan for say 100K and have him carry a second for 50K interest only for 5-7 years at say 5%. My thoughts are that the 100K would give him enough to pay off the note, pay the taxes and still have maybe 30K or so left. Then, if he sold one a year (that is kind of his thought to not pay all the tax at once) the Seller Financed Notes would start coming due the year after he was done selling them - one a year for 7 years.

Does this seem to make at least remote sense? :-) He is going to 'talk to his tax guy', but I also know his tax guy and he is NOT a specialist in real estate at all, so not sure how much that will help.

Thanks, Dan Dietz

@Dmitriy Fomichenko do you still have the list that you have shared before? 

I personally have used Jason Zook @ NASB and been very happy. Just a warning that in my experience they take MUCH longer and a LOT more paperwork that my local Small Bank Portfolio Lender, so plan WAY ahead. 

Dan Dietz

@Macie Moore,

The 'extra' 15K would be 'above and beyond' what he wants out of the deal. Meaning if he wants 125K (75K bank loan and 50K seller finance) you actually do the deal at 140K 'on paper'. This is soley to help YOU have the 10% down that most lenders would want to see. 

Dan Dietz.

Some great advice from @Account Closed above!

Lots of things to think about as you consider the next step in your journey :-)

We just bought a package of 5 properties for about 900K from a single owner. He and his wife, who had recently passed away, had owned them for 20+ years, so mostly depreciated and no loans on any of them. 

IF they had sold before she passed, the tax bill would have been almost 175K between the depreciation recapture and capital gains. Since he got the 'stepped up basis' at the time of her death, he sold them to us within 6 months and only had that small 6 months worth of capital gains tax.

Dan Dietz

@Macie Moore,

A few thoughts. 

First, I would use the Rental Property Calculator here on BP (free for like 5 uses) and IF you keep moving forward with this deal I would HIGHLY recommend doing the upgrade to PRO - you get unlimited use of the calculators and access to all the past webinars which would be invaluable to you as you start your journey!

In this situation, you could see if they would want to do ALL owner finance, but as you'll hear from others, there is a SMALL risk of the bank 'calling the loan' if they find out. In your situation, being new landlords and probably not having the cash to pay it off IF that happens, I would not want to chance that myself.

In regards to how we are doing it, it might work for you as follows. I am going to use rounded figures but you'll get the idea :-)

Say Properties are worth 150K, Grandpa owes 75K. What I would do is find a SMALL LOCAL bank or Credit Union that dose Portfolio Loans (these are though the 'commercial lending side') which are held 'in house' unlike FHA etc.... more flexible usually. Our current terms are 5.125% interest amortized over 25 years. They want 20% down, but dont care if half of that 20% comes from the owner carrying a Second Mortgage (that's the Seller Financing part of things).

Tell the bank you are looking for 75K loan so that you can pay grandpa that and he can clear out HIS loan.... no more 'bank calling the note due' issue. Then, if grandpa wants say 50K more, tell him you'll give him 65K more, he can give YOU a 'gift' of the extra 15K that you can use for the down payment and still have his 50K. 

This 50K that he would 'carry' could either be an 'interest only loan' for a period of say 5, 10, or ??? years at maybe 5% (rate could be reset every 5 years maybe?). This works good if he is likely to invest in it in something like CD or bonds. He gets a good return, you get a good rate, etc....

The one we are working on is 225K purchase, we would put 25K down (the 10% they like to see) the owner would carry 50K for 5 years interest only @ 5%, and 150K loan from the bank. Then, by the time 5 years rolls around, we have gained enough equity through appriciation and loan pay down that it hopefully will be worth 250K, and we can refinance it @80% LTV or 200K, pay off 50K to the owner, pay off original loan balance of about 135K and pull 15K of cash out for either another deal or whatever we chose.

Hope that all makes sense.

Dan Dietz