All Forum Posts by: Dan Schwartz

There are so many different flavors of student loans that it's always hard to give advice.

1) your student loan probably continues to accrue interest during your grace period. In 18 months, that will be an $88,000 loan unless you make at least the interest payments.  

2) you have to decide for yourself whether you think any student loan benefits (new low interest rate, 0% interest extension, forgiveness, etc) will be passed into law.  This is a crap shoot.  But if you roll your student loan into your mortgage, and then Congress forgives $50K of *your type of* student loans, you get zilch.  May not matter to you, or it may be very upsetting.  And it may not happen at all.  But there's enough chatter that you would be wise to consider it.

3) can you generate a reliable $1600/mo cash flow from the $180K in proceeds from a cash-out refi? That would cover your student loan as well as your higher PITI, and the assets you buy should outlive your debt payments.

Things we don't know that affect your planning:

A) conventional cash out refis are generally limited to 80% LTV. HELOCS are usually 75-80%, but can go up to 90% in many cases for primary residences. We don't know what state you live in. But it seems strange to me that you can access far more via cash out refi vs. HELOC. HELOC underwriting also varies from bank to bank, so you may qualify for a different amount everywhere you go.

B) are you considering how you'll manage your DTI, if needed, for this? Have you gone through that with a loan officer? Will debt payments of $2830 for your primary and $900 on your student loans (plus anything else you might have...car loan, credit card, etc.) leave you any room to finance an investment property? There are some special DTI considerations when student loans are involved...I think. Ask around. Or will a high DTI force you to purchase inexpensive, out of state properties for cash?

@Harry Argueta assess whether it works as an investment property without the complication of moving your parents in there.

Then you would need to qualify your parents' ability to make the payments (probably $2000/mo) and weigh it against your capacity (emotionally as well as financially) to carry the costs in the event they cannot.

Second mortgages, HELOCs, and LLCs don't matter much at this point.  They just complicate the current decision matrix, and you could be introducing them as "opportunities" to mask what you already know about the situation.

Delays.  Delays in their buyer closing.  Delays in their buyer's lender funding in time.  Delays in their buyer's title agency moving the money around quickly enough.  Delays in the banks accepting and releasing their funds quickly enough.  None of these should happen, but all of them could.  

On top of that, many people take vacation between Christmas and New Years.  Will all of the participating vendors be adequately staffed to handle such a tight and important turn around?

Add a clause that penalizes them for delays, or be prepared to close next year.  That has the possibility of adversely affecting your tax planning.

I hadn't looked closely at these before, and only noticed this one this morning:

https://www.zillow.com/homedet...

7/2/21 Zillow buys for $355,700

9/30/21 Zillow lists for $356,900 (not a typo!)

10/8/21 Zillow cuts price $12K to $344,900.  11 days later there still doesn't appear to be any action.

The listing also says "Buyer agency compensation: 2.25%."  2.5% isn't unheard of around here, but they're shaving 10% off of that as well.

It makes me think of when the SoftBank whale stopped buying call options last September and the whole stock market - especially the NASDAQ - corrected sharply.  It recovered and continued to climb higher, but the removal of a massively-distorting force (the whale) sent a shockwave through the market.   All markets are simply supply & demand + price discovery; a major player just moved to only one side of the market. There will be an effect, and in a place like Phoenix metro I think it will mean a sharp decline in both over-list closings and buyers significantly paying up over appraisals. On the other hand, Zillow is just one player in this space. We have many iBuyers in PHX. And shifts in the real estate market are much slower to see than the stock market   

As for Zillow’s stock, that’s an expected reaction.  No different than if GM said “we’re going to stop making cars for a while.” Even if they have plenty of cars already made to sell, it’s a signal that management doesn’t see value in creating more inventory.  Inventory drives sales, sales drives valuation. Hence the sharp reprice yesterday, though it is definitely part of a deep long-term drop in valuation across 2021. 

@Mike Maruska ask your accountant to determine the tax consequences of selling for you in advance. That’s tax planning. 

The depreciation taken (200k) could be taxed at the 25% depreciation recapture rate. That could be $50k in tax right there. There are a number of discussions on BP about when this applies and how to avoid it.  Your accountant needs to tell you what scenario applies to you.  

The capital gains of $130k, less selling expenses, would be taxed at the 15% rate unless you are in the top marginal tax bracket. In that case, it would be taxed at the 20% rate.  Additionally, only you and your accountant will know if these capital gains will trigger NIIT for you.  

Your suspended passive losses for this property will be deducted when you dispose of the property.  It’s not subject to the $150K AGI cap.  If you have multiple passive activities, you have to look first at what suspended losses you have for this particular activity.  

There’s an interplay between all of this, and your accountant should be able to determine your potential tax scenarios.  Then you plan to minimize them.  

Lastly, don’t forget that if you 1031 into a new property, you will continue to depreciate your current basis on your current schedule.  $270,000 worth of your new purchase will be continue to depreciate $10,000 per year for seven more years.  The other $200,000 is not depreciable in this scenario.  Also, your deferred capital gains of $130k less selling and exchange costs would not be depreciable at all.  

Talk to your accountant about your actual numbers, and good luck.  

Ours were start up costs amortized over 15 years.  I don’t remember if that was before you could take $5,000 in year one or not.  But 1/15 of it was deducted as an amortized expense in Schedule E each year. 

@Michael Paccione quads exist in Phoenix and the surrounding cities, but not in great numbers.  Prices are frequently on either side of the $200K/door range.  I don’t study them specifically, but this is what I’ve seen. Good luck!

@Greg Scott paid off properties still depreciate for 27.5 years.  Without the mortgage interest to pay, the income may be higher and less of it offset by depreciation, but the depreciation does not change when it’s paid off vs mortgaged (unless the full depreciation has been already taken, which I don’t think was in the scope of the OP’s questions).  Just clearing that up.  

@John Villodas if you are purchasing with your SMLLC, then you by definition don't have any investors. Maybe this person is lending the money to your SMLLC? Or have you set up a JV between your SMLLC and this partner/investor? If that many questions can arise on a public message board, this other party's concerns might be valid. Think through and understand exactly what it is you are doing regarding the acquisition of this property. Good luck!