All Forum Posts by: James Triano

@Brenda Whittaker

I haven't heard of lenders having a minimum for a secured loan.  Are you getting denied by banks or is this just private money?  The good news is that with a loan that small you could go the hard or private money route and would be likely to find someone to lend to you.  I'd continue to seek out banks and particularly ones who do portfolio lending. 

These ratios seem interesting, I haven't really thought about it in those terms.

Let's use a simple example to illustrate this so I can better understand what you're saying.

If you own a $100,000 property, you're saying you should have $20,000 in equity, $80,000 in debt, and an additional $10,000 in reserves or cash for the property?

If those are the numbers, then I'd say those would be adequate.  Also, if those are your minimums, what would you say your maximums are?

@Seth Nowak

I'd suggest that since this is your second property and if you're planning to continue to add properties to your portfolio, this is a good time to bite the bullet and hire an accountant.  This is a biased opinion (because I am an accountant) but there are times when the savings on taxes you might incur will pay for the accountant's services.  If you're planning to stop at two properties, then I would suggest you spend some time really familiarizing yourself with the IRS Tax Code around rental properties and continue to do your taxes yourself to save money.

Probably the biggest tip I could give is around depreciation.  Many folks equate cash flow with taxable income.  Just because you're cash flowing doesn't mean you should have taxable income.  You need to ensure you're depreciating the value of property (excluding land) over the allowable time frame, likely 27.5 years if it's a residential property.  You can also depreciate appliances and other fixed assets as well to lower your tax liability.  

Welcome Joseph.  I, too, am in PA.  Happy to have you in the community. @Joseph Dalessio

@Ella Dembo

The best neighborhoods for flipping will probably be a bit closer to the suburbs.  You're going to look for Mt. Lebanon, Dormont, and Upper St. Clair in the South Hills and Allison Park, Wexford, and Ross Township in the North.  Flipping in the city of Pittsburgh will be a bit tougher because many of the houses are row-style homes and the construction becomes more complicated.  Plus, the average age of a city home is probably 80-110 years old.  

It really depends on where. For example, the Pittsburgh market has a great rent to price ratio and there are some good neighborhoods where you can find cheap properties. However, in Philadelphia you're going to find higher prices and much more competition (more people). There are some more rural areas in PA that could work as well. It just depends on whether you're flipping, buying and holding, etc.

@Debra Bee

Is your property in a business such as an LLC, S-Corp or C-corp? If it is, then you must set up a business account using your Federal EIN.

If your property is in your personal name, then you can simply use a standard checking account.  If your bank offers a business account with low/no fees, then you can opt for that as well.  

You can definitely have your property account at the same bank as your personal account and it will likely be easier to set up. 

@Mark S.

1) Yes, it would but only slightly. First, I'd probably opt for a way to not incur it on my primary residence, if possible. If I had it, I would evaluate my personal debt situation and pay down everything else I could (car, credit card, etc.) first. Then, I would do the same ROI calculation. If I can invest at 10% while the PMI is 8%, then invest, etc.

2) I think the increasing interest is actually real. Here's how I see it. If you have the ability to outlay cash up front in return for some payment (or lack thereof) in the future, then there is a calculable return. If your PMI payment is not decreasing proportionally to the amount of principal you owe, then that increasing interest holds true. In your example, the $100/month and $100,000 house, see the below calculations.

Year 1 - PMI - $1200; Amount to Pay down to 78% LTV - ($95,000 - $78,000 = $17,000) - $1200/$17000 = 7%

Year 5 - PMI - $1200; Rough Amount to Pay down = $13,000 - $1200/$13000 = 9.2%

Year 10 - PMI $1200; Rough Amount to pay Down = $8,000 - $1200/$8000 = 15%

Hope this helps!

@Mark S.

Your question and analysis is spot on.

You definitely need to evaluate your cash on cash return for such a deployment of capital. I have PMI on my original rental property and right now I'm still about $20k away from being at the magical 78% Loan-to-Value. This IS an FHA mortgage but was done prior to the 'life-of-the-loan' requirement (which, by the way, makes FHA loans a bit more unattractive now in my opinion). I pay about $140 per month in PMI which is an 8.4% ROI if I pay the mortgage down to the 78% LTV. I'm able to get better returns through flipping/my other investments so I haven't paid it down. If that ROI number changes over time, I will reconsider.

Something else to consider is the tax consequences of such a pay down. Let's say your marginal tax rate is 25%. You're able to deduct PMI as a business expense. In my example of 8.4% ROI, we're really talking about a 6.3% ROI if I pay it down because now I'm losing those tax benefits and paying income tax on that additional cost savings.

I advise paying down the mortgage if you're unwilling/unable to secure any additional investments of a comparable return. However, I advise to NOT pay the mortgage down if you're able to outperform the ROI on the mortgage pay down. The answer always lies in the numbers on how one should proceed.

@Rickie Mincy

I would open two checking accounts actually.  I would label one account as your "Operating Account" and the other your "Deposit Account".  The reason for the checking account for the security deposit is that depending on how long you hold the deposit (and your state laws) you may or may not be allowed to collect interest on the deposit.  Just to be safe, I always use two checking accounts.  The "Operating Account" will have all of your rents in, expenses out, etc.  

As far as using the personal money for repairs, I would absolutely transfer the money into the account, then pay for the expenses directly out of your "Operating Account".  It will always be easier to track that money over time and will make life much easier come tax time.  You can just consider your personal money in as "investor contributions".   Good luck and congratulations!