All Forum Posts by: Russell Roberts

Can unused passive losses carried forward from prior tax years be used against active income in the current tax year, if the taxpayer has qualified per IRS rules to become a "Real Estate Professional" in the current tax year?

@Megan Brooks

I completed the purchase of a new SFR for 120K financed via an All in One loan originated by Ridge Lending group. Below is my experience and thoughts.

I signed purchase contract and submitted to Ridge on Jun 8, 2020. They did tell me they were busier than normal and, to be fair, I had not pre-qualified with them. But I am able to easily qualify and submitted a full package of electronic documents to them on the same day. The process of getting loan approved was one of the most detailed (from documentation required) I’ve experienced thus far. Despite me supplying each additional document required within a day of the request, the entire process to funding and sale close date took until Aug 12, 2020. (65 days to close)

Terms:
25% down payment.
2.5% loan origination points on loaned amount, plus other closing cost
1-month LIBOR index plus a margin of 3.75%. The margin is fixed, the index is the variable part. Current rate is 3.
My normal closing cost (excluding prepaids on insurance & property tax) for a conventional 30yr mortgage for similar SFR has been $3800 - $4100 range. The All In One, was $7822. $2,250 of that was the 2.5% loan origination points on this type of loan. In addition, I had to pay an additional 1% down payment so that there was time for the loan to get transitioned to the final lending institution before interest accrued and exceeded the max approved credit limit before I had a chance to make a payment. It took until Sept 11, 2020 (30 more days) before the associated account with Northpointe Bank was set up.

Conclusions:
Loan took twice as long as normal and was more difficult from documentation standpoint.
I paid 26% down payment.
The closing costs were nearly $4,000 above normal.
My credit score immediately dropped from 804 to 775 (with nothing else changing except for the AIO hitting my credit report)
The floating interest rate is reasonable.
The remote banking with Northpointe Bank checking account, mobile app, ACH, autopayment scheduling is all good.
I’ve made this my primary depository account and auto payment source for other mortgages.

Am I happy with the decision? Yes.
For ONE property in an investment portfolio, I like this line of credit flexibility. Instead of letting idle $ (money being saved for future purchases, cash liquidity for repairs, etc) sit in a near 0% checking account, it now sits in the AIO which immediately saves a guaranteed 3.9% interest expense, secured by a SFR that is otherwise making positive cash flow, appreciation and such. It'll take me 2-3 years to recoup the extra front end loan cost, but I'll have the line of credit tool available for many years to come (assuming that interest rates stay reasonable).

Hope this helps anyone else considering this funding option.

At this point, I've changed my mind. Largely due to the lowest interest rates of my lifetime. Cash reserves sitting in a money market are making near zero now. I can purchase a quality turnkey SFR, with a tenant already in it, for a 7% cap rate. The floating All in One rate is now < 4%. My strategy for this one HELOC loan in SFR portfolio is twofold. 1) Place "cash reserves" here, plus 2) my new savings toward down payment of next SFR purchase. This is a win in two ways. It keeps the HELOC loan balance lower, thus reducing overall interest cost and the money sitting against the balance is also making the cap rate of property vs nothing in a money market. It is also a liquidity tool for many years to comes. When I put the spreadsheet to it, I like. Note: On the All in One, the 2.25% origination fee is applied to what you initially borrow, with a minimum loan size of $75K. So I'll initially start with the minimum loan size with some cash reserves taking up the additional space between there and purchase price. I'm doing the loan qualification paperwork now.

For other SFR purchases, I'm locking in the lowest rates in a lifetime for 30yr term.

@Peter Schuyler, I'm glad to hear your investment experience is improving.   I have 2 properties with Memphis Investment Properties.   A summary of my experience on the 2 is:

I initially purchase both in Dec 2017, which is the worst time of year for getting tenants into place. 1 property took 2 months and the other took 3 to get initial tenants in place, however the occupancy has been very good ever since. MIP increased the rent by 3% after one year on one. And increase by over 4% on the other at end of 2 yr lease. I've had one tenant turnover. It cost $1,300, but $550 was taken from tenant security deposit. MIP got it rent ready and released quickly. I understand that their standard lease terms are now for 2 year, with a 4% increase at end of 1st year. They are getting top of market rents. This is only possible because of the quality renovation work they do before sold to an investor. My maintenance and repairs expense thus far has been reasonable. My returns are running very close to their original proformas. I am in process of purchasing a 3rd from them. As a passive investor, the balance of property renovation quality, 8% property management fee, and the Memphis market rent-to-purchase price ratio is something that is hard for me to match in my local market. Reach out to me if you'd like to share thoughts with each other on a conversation.

@Dan Schwartz 

A great thought. Thanks.

thanks for thoughts.  I see where the IRS says, "You have to file an income tax return if your net earnings from self-employment were $400 or more."    It seems like they think >$400 is significant self employment income from that statement.

I read the "Hobby or Business? IRS Offers Tips to Decide"   I think an argument could be made either way.   I.T. services work is certainly not recreation. :)   Maybe if I just billed a few hours of my work at full market rate and then volunteer donated whatever other amount of labor I wanted personally, it would be arguably more for profit incentive.   

I have a group 401K plan at my W-2 employer. I have an unexpected opportunity to transfer funds out of 401K plan while I'm still employed. Yeah! I'd like to transfer funds to a self directed retirement plan and invest largely in real estate syndications which take advantage of debt leveraging. I know a self directed IRA would be subject to UDFI, so I"m interested in solo 401k instead, which is exempt from UDFI.

I don't currently have self employment income, which I need to qualify for solo 401K. However, I'm a major volunteer of Information Technology professional services to a local non-profit Christian school for the last 13 years. I volunteer for mission, not $, and have likely saved organization >$100,000 over that time.

Finally to my question: How much $ do I need to make to legitimately qualify for creating a solo 401K as the destination for the transferred retirement funds? If I billed the non-profit a nominal amount of say $150 per quarter and received an annual 1099 for $600 of services, would that satisfy a solo 401k IRS auditor's scrutiny?

Impressive.   I'm curious on a couple of items.  

- What type of collateral was tied up to secure the 100% financing from local bank?   

- What year was this?

Congrats and thanks for sharing the deal details. 

I'm replying to your question with the assumption that you want to be a passive investor. I've been a passive investor in both Turnkey SFR and Mulifamily syndications. I made a comparison grid to help contrast the two options in my own investing. It's a blend of facts and my own semi-experienced opinion. See linked document. Passive Investing: Turnkey SFR vs CRE Syndication

I considered this from Ridge Lending on an investment property. My thoughts were as follows:

I wanted to have approx $40K in cash reserve liquidity (in case of emergencies). I could keep in a Money Market at 2.x% return OR, what if I kept the $40K sitting in the additional equity of the property that I could tap into the line of credit in the event it was needed.

The quick math:
A rental property @ 8% cap rate - 6.190% floating LOC rate = 1.8% interest rate arbitrage on the extra $40k sitting in equity. That's some less than what I'd normally be satisfied with, but it serves the dual purpose of cash reserves if needed. I'd also be benefiting from the latitude to pay down or not on very flexible schedule. Maybe some price appreciation on property would occur and I'd have depreciation to offset rental income and such. I ended up deciding Not to do this for the following 2 reasons.

1) The loan origination costs were higher than I expected. ($5,657 on a 120,000 property) It included 2.25 upfront loan points. (BTW, I have excellent creditworthiness).
2) Tax confusion: The interest expense might be tax deductible. If I took some line of credit equity out later, I think I'd have to trace it to either another investment, or if it was used for anything personal, then I could not. There is actually a checking account linked to this All in one LOC. I just thought this would get too messy for me with the new interest tracing rules for determining tax deductibility of interest expenses.

This might be a better fit attached to a personal residence (I think the rate would be better too).