All Forum Posts by: Account Closed

@Amanda G. If you are looking to 'Cash-Out Refinance' then you will have a near-impossible time doing a cash-out refinance. I typically look at properties with ARV around $100k to make sure this doesn't happen to me. Also, most states set the limits on Cash-Out Refi's to 75% LTV.

@Kyle Burrows are you really going to let the tenants control the negotiations here by offering $400/$25? Ultimately, it's up to you. Personally, I would advise them that they are in breach of the contract and the decision is not up to me - it's up the the lease (which is the legal document here) - and so they need to become compliant to the lease terms. 

Truth is, they tried to get one over on you. They didn't forget to tell you - they knew that this would be an issue and hid it from you as long as they probably could. If they had any respect for you then they would have called you first to discuss everything BEFORE buying the cat. 

Just a thought, but in the future, perhaps you can have language in the lease regarding what happens if the terms are breached. For example, maybe if this situation happens again the term lease converts to month to month and the rent increases by 15%. Just a thought. 

@John Underwood would you mind expanding on your tax lien strategy a bit? Are you buying properties at tax auctions or just the liens? My understanding has always been that properties with unpaid, outstanding tax balances typically are auctioned off at the municipal level. 

@Ali Boone you bring up a good point regarding financing under an LLC. In my situation however, I am buying to hold for cash flow. I am financing the property up front under my personal name/credit and then 'Quit Claiming' it to the LLC. I've already cleared this with my lender as all of their mortgages stay in house so no risk of "due on transfer."

Also, as far as I understand it, I cannot refinance the property while it is titled in the LLC. However, if I desire to refinance in the future, I can simply Quit Claim it back to myself as an individual and refinance it from there.

@Dr. Jordan E Smith You will find that everyone has their own opinion. Personally, I like to look at Cash-on-Cash ROI. For example, if I buy a $100,000 SFH with 20% down and $7,500 in closing costs and minor rehab, then assuming I can rent it out immediately for $1,100, I will probably net $280 monthly after expenses (closer to $400 monthly if there are no vacancy/repairs/capex charges during the year). My ROI on the $27,500 cash invested would be 12% conservatively but could be much higher, again, if there is no no vacancy/repairs/capex during the year.

For me, my absolutely worst case return requirements is 9% but I always shoot for 12-15% as a sweet spot. Anything else is icing on the cake. 

@Brandon Hall and @Brian Schmelzlen - thank you both for your reply! I wasn't as clear in my question as I should have been, however, and left out a key detail...

I did mention to my friend that I believe principal payments made using rental income were subject to taxation. My reasoning being this: what would keep investors from buying properties with 100% cash, writing a note themselves against their property and make principal payments using rental income - thus allowing them to avoid taxation on the portion of rental income that is applied to the principal? 

Can either of you provide guidance on this?

EDIT: To add to this, what I am trying to convey to my friend is that, per my understanding, principal payments are taxed but the depreciation offered by the IRS offsets that tax liability. 

What's up everyone! A close friend and I just had a discussion regarding the tax treatment of P&I. Whoever is right gets a bottle of Tito's so, no pressure here! 

While talking up funding strategies, I mentioned to him that, based on my understanding at least, mortgage interest is expense-able and the principal payment IS NOT. My reasoning for this is the IRS provides depreciation of assets, so being able to also write off the actual cost of the asset would likely be 'double dipping.' 

My buddy, on the other hand, is under the impression that property owners can write off the principal as a business expense, regardless of structure (LLC, Sole Prop, S-Corp). He cites this as one of the best reasons to invest in real estate.

Now, I could be wrong, or he could be wrong, or we both could be wrong - I'm looking to YOU for guidance. Thanks!

@Carl Fischer Thanks or the insight. This is my first property but I am currently putting offers in on several more so this LLC is part of an overall asset protection strategy given my net worth. Here in Texas, we can file a State LLC or, if an LLC already exists from another state, file a foreign LLC. Since my property is in Louisiana, I'd like to file an LLC in Louisiana. Just curious how to do so without being regarded as a foreign entity.

@Ali Boone I see you are in California. I know the costs for LLC's in California are astronomical. I am in Texas and purchasing a property in Louisiana where the cost to file is only $100 with a $35/year fee. I've also owned a few LLC business es in the past and here in Texas and Louisiana, they are not prohibitively expensive. Thanks for the concern though!

@Brent Coombs Thanks for breaking that down. To be honest, I find it rare that an investor will BRRRR without having any 'skin in the game' at the end. The mindset I take is that, when all is done, I am buying cash at a discount - it's just that the cash is held in the property in the form of equity. And regarding the rent/cash flow - you are ABSOLUTELY right. This only would be beneficial if the property cash flows (as to how much, that is a different topic of discussion since everyone has varying requirements).

@Matt C. Let's say that a wholesaler brings you a deal with an ARV of $100,000 and he is asking $80k. Let's assume that rehab is cosmetic and around $5k total. Basically, the wholesaler would be selling you a $100k property for $85k when all is said and done. As a flip, this may not make sense because you will need to budget up to 10% in seller's cost (i.e. agent commissions and seller paid closing costs) which would amount to $10k on this scenario. Your net profit as a flip - assuming you paid cash and there are no holding costs involved or hiccups, would be a paltry $5k for all your time spent.

However, looking at this from the eyes of a Buy and Hold'r, you can buy and rehab the property for $85k and then cash out refinance it at about 75% LTV against an ARV of $100k. For simplicity sake, you are out of pocket -$85k up front but receive +$75k on the cash out refinance which brings your net cost on the property to $10k BUT you still have $25k equity 'banked' in the property! You basically just CREATED $15k.

Bear in mind this example disregards the cost of capital (i.e. hard money / short term loans). It also disregards the cost of obtaining a mortgage as well as any monthly holding costs involved. Even so, assuming an additional $5k in expenses, you would still be creating $10k AND have a cash flowing money making machine. 

Best of luck!