All Forum Posts by: Tommy F.

FHA then cashout refi years later, use cash to move up, used VA loan, 401k loan at market high point, just sayin' don't take out a 401k loan when it's NAV has tanked, and used other savings. Yes, lenders want to see six months reserves, but many will consider value of 401k or other marketable securities.

I just changed the oil, myself, in my 2004 pickup with 199,574 miles. It drives fine. It was paidoff years ago. I prefer having my three houses and older vehicle. Tenants probably never read "Rich Dad Poor Dad".

Correction to my last post, collect the balance on 1/1/2017...I typed 2016. Also, this is an open forum and we're here to exchange ideas, opinions, and experiences. Just because a tenant wants to pay upfront doesn't mean it's a scam or they're hiding something. I've experienced the same thing and the applicant simply wanted the property that was in a competitive area with a great school nearby. Paying in advance was their way to show a firm commitment. Take care. I hope it works out well for you.

You may think you've hit the jackpot but I believe you're about to potentially cause yourself a tax problem. You're a "cash basis" accounting taxpayer meaning you recognize rent revenue at the time it's received. You record your expenses at the time they are incurred. You need to understand the term "Constructive Receipt". 

When receive cash, check or other cash equivalents and they are in your control then you have "constructively" received those funds and thus you must record it as income AT THE TIME received not when you earn it, i.e. as the months pass by. The IRS rationale for the constructive receipt doctrine is that the income is available to you and therefore you cannot postpone the income recognition. Why is this a problem? Do the math. 

Imagine you own one rental house, and it rents for $1000 per month, and your tenant pays a year in advance. If this occurs on January 1, great, because you'll have a year of expenses including depreciation to offset the income and thus reduce or eliminate your tax liability while providing positive cash flow. 

Imagine the same house, and you get a year's worth of advance rent on December 1. You now have constructive receipt of $12000, one month of depreciation, and one month of expenses. You'll be paying too much tax! Arrange for your tenant only to pay through the current tax year and on January 1, 2017 pay the remainder of the rent term. Constructive receipt also applies if you use a property manager. If your manager gets the year advance, they must give you a 1099 during the current tax year for the amount received.  You have control of those funds even through your manager in the eyes of the IRS.  The IRS considers income received by an agent the same as if the taxpayer actually receives it.  Of course, you and/or your manager can roll the dice and take a chance, but I don't recommend it.  Caveat, I'm not a CPA, but I'm but I'm pretty sure this is accurate.  Nonetheless, be safe and consult a tax professional.  

Your tenant may have bad credit, but lots of cash because they may now have a well-paying job or they fell into a pile of money.  If they're not criminals and just made bad credit decisions, take the advance rent pro rata through 2016, charge a security deposit, collect the balance 1/1/2016 and roll with it.  Good luck!

She may not be your girlfriend much longer. Happy dating.

Are you saying after operating expenses, taxes, interest, and depreciation you had taxable income? Or your cumulative passive losses can't be used to lower your taxable earned (W2) income? Passive activity Real estate losses can only be deducted to the extent of of other passive income. For example, two houses generate a passive loss of $2000 and two other houses have taxable income of $3000. Your taxable income from passive activities will be $1000. There is a $25000 allowance available to offset active income but special rules apply. Then there is the IRS designation of a real estate professional and material participation in the activity. All of this is on irs.gov

Daniel

I'm pretty sure the answer is no VA loan to an entity. The VA benefit is for the individual service member not a company regardless it being an LLC owner by the service member. Your fourplex will not have any equity for years, so it won't be much of a target for a lawsuit.

Checkout VA Pamphlet 26-7

Good luck. 

Tommy

Joshua

I'm reading a lot things into your post, 100 year old house you love and have emotional/sentimental attachment to it, vacant lot next door, $160+/- primary home mortgage, and desire to get into real estate development and/or buy and hold. So, with that, I'll share my thoughts of which trail many other good ideas already posted, I may go long so bear with me.

There is really not a perfect answer to your questions. Many members have posted great suggestions that work, but it comes down to you. You could live by the numbers and do only what the numbers say or you can factor other variables into your decision. Nonetheless, here is my two cents for things you may want to consider.

If you sell the lot and continue to live in you 100 year old house, and pay-off mortgage, consider where that leaves you. You'll have someone building something next to you that you must now love, hate, or be indifferent. You have a paid-off primary mortgage, but I submit that mortgage is an "asset" assuming it's low fixed rate. As time goes by that mortgage payment gets easier and easier as you get raises from your day job or get more cash flow from investments. Check the numbers in your area on any number of houses using the tax assessor's website. Pick a house, look at two most recent sales (ideally many years apart) and calculate the annual appreciation rate based on the two sale prices and that should give you a good safe idea of what to expect for appreciation. Forget about high-flying numbers of boom towns, do your math with conservative numbers and if it works, great. If a boom hits, then you've hit gold.  

So, what's the point. Do the math. Assume a fixed rate mortgage of 3.25% - 3.75%, annual appreciation rate of 2% - 3%, tax deduction for mortgage interest, and inflation. Can you see where I'm going? I'm not in the school of paying-off "good" debt at low fixed rates backed by a high quality asset (that's me) you must decide on you. Paying off the primary home mortgage is about piece-of-mind from my perspective. If it makes you sleep better, then do it. Otherwise, run the numbers and they should tell you your next move. With a paid-off mortgage, you have dead equity as one member posted. You'll be living in an ATM for which you can't get out all the cash without getting a HELOC. Also, consider your cost basis on the vacant lot and determine your capital gains tax, other municipality taxes that may be triggered, and broker commission if you don't sell it FSBO. Your profits on the lot are eroding as I type.

A member posted using a 1031 Tax-Deferred Exchange and I agree.  You can leap your way into possibly two rental houses by selling the lot. Those houses, assuming variables, will yield some or all tax-free cash flow that you can use as a set-aside for reserves and/or saving for the next down payment. I assume you have a job that pays you enough to cover the primary home mortgage, that job is an "asset", and I suggest keeping it until you're really pulling in money from RE. 

Shift gears to building a new primary residence on the vacant lot, "anchoring" or keeping the 100 yr old house as a rental. Are you going to be happy living next door to a tenant. You have some emotion tied to the old house, are you ok with someone else living in your old house at any price?   Selling the 100 year old house seems to evoke some emotion because you believe it will be torn down by a developer. I get it, but are you in this for emotion or investment? No offense, you have to decide. If you want to save history are you willing to pay the price for it? 

Very long post, sorry, I got carried-away, if it were me, I would do a 1031 Exchange and get into either two $80k houses, one $160k house. Get rented, become a "seasoned" landlord (2 years), then do a cash-out refinance on the rental getting as much cash as possible (making sure you still cash flow positive), and use the cash-out money for the next rental house. Lots of ways to do it and BP is filled with super savvy people that have done it. 

All the best,

Tommy  (MTSU alum)

Nate

I have some feedback for you regarding land development. Disclaimer, I am not a developer by profession, but I own 9 acres I've tried to develop so I can share some lessons. 

My intent was to build a house on the land for my family, but that backfired during the financial crash. I had to move on to other things, but kept the land. I'm a buy & hold investor renting1 single family house and 1 townhouse in the Charlotte metro area and trying to make the move into bigger things, so BP is a great place to learn. I, too, listened to BP 168.

I assume you've run the numbers (land cost to improvement cost) and you're confident about the value of the finished product and rents it will bring. I have some lessons learned and things you should consider and/or research. Some of this stuff you may or may not know, so I'm just laying it out as if you know nothing and it's in no certain order.

You need to find out the zoning. Can you get density increased? At what cost? Getting land entitled can take months maybe years. You must appear before town planning staff, then planning board, then town commissioners, and it all takes time, and they often want things such as road widening improvements in the area of your development, contributions to the cost of street lights, they want impact fees, and if schools are overcrowded they may make your project next to impossible.  Also, just because you want to build doesn't mean surrounding neighbors want it. In North Carolina, landowners with contiguous borders to the proposed development are allowed to file a protest petition which can derail the developer temporarily and maybe permanently. Also, citizens get to attend town hall to speak for or against your project in an attempt to influence commissioner's vote.

Back to zoning - does the zoning allow for clustering, if so, how many acres are required to cluster? Often there is a minimum, i.e. 10 acres. Clustering allows you to maximize acreage even if some area is not good for building. Example, imagine a perfectly flat 10 acre tract. If you have R40 zoning (1 house per acre) then you still may not get 10 houses due to streets which is another subject, then setback requirements, and easements/rights-of-way. You may only get 9 lots on 10 acres. If you have 10 acres of marginal land (hills, creeks, etc) you may get even fewer than 9 lots unless clustering is allowed. Imagine 10 acres of which half is buildable and half is not. Clustering allows you to use the entire 10 acres square footage in your calculation for total buildable lots.

I mentioned creeks, consider other wetlands, and or 100 year flood areas, low-lying run-off areas. Retention ponds for storm water run-off, again often tied to subdivision size.

Major sub-division, minor sub-division (what are limits?) Major may be 25+ houses - aside from the obvious differences, street size requirements can change depending on the number of houses, curbs and sidewalks may be required for major sub, but not for a minor. Streets may go from 22ft wide to 24ft or more. Street lights may be required. The town may require you to purchase a performance guarantee bond to ensure you pave the streets and install lights after all the houses are built.

Connectivity: town planners may require sub-division to be connected to others via streets or walkways or both, often tied to size of development, and street size. Street size may open door to cut-thru-traffic.

Sewer or septic: Is sewer available? Do you have direct sewer access? If not, can you get an easement? What is the land topography? Will sewer gravity feed or will you need a lift station? Will public works require you to contribute to cost of infracture for the greater area? What are the tap fees per lot to access sewer? If sewer is not available, does the land perc for septic? If so, there are set-back/reserve areas required for the drain fields which cut into buildable area (see clustering). If septic perc is sketchy, then you may need an advanced septic system which is more costly.

Water - County or city water?  If not, you're drilling wells and hope water is down there.  Wells have to be offset certain distances from septic fields (imagine that) and that cuts into building area, see clustering.

Speaking of costs, assume you get the land sub-divided into buildable lots, and you're building one house at a time. Well, the tax assessor comes along a changes the tax value from that raw 10 acre tract without entitlements to a much higher tax value on each separate lot. Depending on how long you hold the land, those tax bills will eat away at you. And then the finance costs, yes, there is money to lend everywhere, but for raw land you will pay a premium to finance it because it's inherently more risky.

Trees - they are beautiful but can be very costly.   A conservation study may be required to study on the trees.  Hence the reason developments may be clear-cut and it's done before all the other steps so there are no trees to study, and it makes building easier.  

It all sounds easy, buy land, build house, rent it, get check in the mail. It may be that simple for the right piece of land and it can be that easy for those who know what they're doing and have the financial resources to get there. Don't get the cart before the horse, do your homework. Good luck! I hope to see a post about your success.

Tommy