All Forum Posts by: Tommy F.

@Henri Meli the property is under contract. Rezoning is required which means site studies and plans, traffic studies, community meetings and town council approval, and many of the other things mentioned in prior posts. It’s a fairly long process.  Fortunately, I have a well-qualified buyer with the knowledge, skills, abilities to navigate through the rezoning process.  

@Delmas Edwards You got a house, got it rehabbed, and you did it with credit cards all-in for $28,500. Congratulations, you made something happen. You live in the Detroit area (Warren) and the house is in Detroit (btw it looks nice), and you believe in the area - that means a lot. Yes, the credit card interest is high, but now you just need to tackle it with everything you've got, i.e. rent income, part-time income, etc. Look at it this way, if you paid $50k cash for the house and rented for $775 per month, using 50% rule for expenses, your NOI would be $4,650. That's about a 9% cash on cash return. But you didn't pay cash, so what? Don't run at the first sign of difficulty. Throw everything you can at the credit card debt, to include seeking a refinance and/or 0% balance transfers to another card, and in 3 to 4 years your total interest expense should be less than $15,000. Keep good records to prove the credit card interest is directly tied to the property and it will qualify as a deduction. Jessica mentioned call Dave Ramsey, he'll just tell you to eat beans and rice, and save-up to pay cash for rental property. You're in it now, this is your baby for the next few years, just stay close to it. I think you're going to succeed. Hang in there. Good luck!

@Alexa K. Does the FHA care? Yes, they care. FHA offers favorable rates and terms to put people in homes not to benefit investors. Do they enforce it? Yes, they do and often it's the fraudster who trips-up and exposes themselves. You're starting out an investing endeavor with the willful intent to mislead, lie, and/or commit mortgage fraud and insurance fraud, and you've posted it on a public forum. As a landlord, do you care if your potential tenants lie on your lease application? Please rethink your strategy.

@Christian Beebe

You're saying you spend $150k on average per year with credit cards for expenses on income properties and you're able to pay-off on average 95% of the card balances each month leaving 5% exposed to being charged interest each month. $150k x 5% = $7,500 per year on average that may be charged interest.
Why not simply loan your LLC (if you have one) $7,500 to $10,000 and pay yourself interest from the LLC? You're either going to incur credit card interest expense or a working capital bank line interest (and fees) for the use of less than $10k per year on average. My humble two cents: Loan yourself the money, pay yourself interest, continue to earn cashback or miles, and be done with it.

@Krishan Sharma

First, to qualify for the Section 121 exclusion of taxes on sale of a residence, you must live in the property two of the previous five years ending on the date of the sale. So, you could rent the townhouse, sell it in two years, and pay no tax. Second, when you put the townhouse into service as an income property your basis must be the lesser of fair market value or cost. In your case it appears that cost is lesser which means you'll be paying capital gains on at least $400k +/- in the future assuming values hold. IMHO sell the townhouse now, deploy the gain into a few income properties. For example, 2 or 3 bread and butter 3bd/2ba SFR can easily be purchased with $400k and will generate more cash flow than the townhouse. Good luck.

@Michael Pitsos

It doesn't appear that you're considering other expenses that will drive your negative cash flow further into the red such as capex, repairs, vacancies, management, etc. Only comparing the potential rent to offset the mortgage will not result in a good outcome for you. The numbers won't even make sense to re-finance into a 30 yr note. If you must move, sell the current residence, get your equity out and bank it until you find a rental property that makes sense. Meanwhile, use the VA loan to get into a new home for 0% down. Good luck.

@Micah Mcarthur I don't have the Fannie Mae details in front of me, so I'm not doubting what you read. To qualify, you may have to provide a letter of explanation defining the intent to purchase a home for elderly parents who are financially limited. There is also a borrower disclosure required that states something along the lines that an immediate family member will occupy the home and that the property is not intended to be a rental. I suppose you could split hairs with the last comment about "not intended to be a rental". I believe the context is that the buyer doesn't intend to get the loan with favorable terms and use it specifically as an investment (rental) property. The overriding purpose is to have an immediate family member occupy the home. Also, to qualify for the purchase, the family member may offer monetary gifts to the buyer to help get the loan. It's all about the intent. Whether you call it gifting or renting the end result is the same, but they are technically mutually exclusive events. In my original post (I didn't go back to read it), I believe I was saying that the technicality of "renting" to the parent and using a lease was to (1) legally protect them (and you), and to make it official should you die, get divorced, or go bankrupt, and (2) make it official for reporting on Form 1040 Schedule E and using the tax benefits.  Regarding their protection, there are numerous BP posts about investors inheriting tenants who pay below market rent and they tenant must either agree to pay higher rents to the new owner or when the lease expires they're asked to leave. A long term lease protects your parents from the immediate shock of that possibility and gives them time to make other arrangements if needed.

Regarding the tax consequences, I believe I cited a tax court ruling about renting below market to relatives that results in a passive loss.  And, yes, there is the special $25,000 allowance. See the Instructions on Form 8582 for information about how to report any income or loss from the activity. The $25,000 deduction gets phased-out as your Adjusted Gross Income reaches/exceeds $125k. https://www.irs.gov/publications/p925#en_US_2017_publink1000104571

@Homa Teramu Seems like if you had a 30 mortgage you’d be cash flowing $200-$300 per month depending on taxes and allowances for vacancy, capex, and repairs.  Anyway, if you can sell it, clear $100k, pay commissions, and walkaway with over $90k, I would sell it and use money for down payment on one or two new places that result in a better cash on cash return. I don’t know how the new tax laws will treat it, but previously you could avoid taxes on the sale assuming you lived in the property 2 of the previous 5 years prior to the sale. You may want to have a CPA check it for you.  Good luck!

@Coles Mercier 

Go to https://www.usps.com/manage/forward.htm and you can "forward" mail for a year or simply change your address with USPS.  The address change tool is at the same URL.  It costs a mere $1.00 to validate your identity and you'll get all kinds of discount coupons in the mail that more than make up for the petty expense.  It's a catch all service and anything in your name gets sent to the address you specify.  It won't affect your tenant's mail because the change is based on your name.  Good luck!

@Andrew Shippy You are free to classify everything as expenses if you want, but just know you are playing with fire. Making willful or negligent misstatements on your tax return is fraud that can result in stiff penalties. You do not want be audited by the IRS, especially with skeletons in the closet. In all that you do, my advice is do the right thing even when nobody is looking and you will be fine.

The IRS publishes rules for a reason and it is your job or your tax professional’s job to know the rules. Using tax preparation software is no substitution for not knowing the rules.

Property owners can deduct expenses for “repairs” and “maintenance” of their property and equipment. A repair is routine maintenance that keeps your property in a normal operating condition, but it does not materially increase or improve the value or substantially prolong the useful life of the property. If you perform a betterment, restoration or adaptation to the property then the cost for it must be depreciated over its useful life. Remember the term BRA: Betterment, Restoration, Adaptation. You may want to read IRS Publication 535.  Expensing everything and later telling an IRS auditor you read on BP that it is ok do it that way is not going to spare you.