Paid cash, did I miss out?

Question

I bought my first rental in in a lump sum payment and have no mortgage. Am I able to write off the purchase price in anyway or did I mess that up by just paying in full?

Corby Goade · Answer

Paying cash doesn't change your ability to write off your business expenses in any way. Obviously you can't write off interest charges, but that's a good thing, right?

You may have missed out on leveraging your cash more efficiently, but the good news is that it's not too late. You can always do a cash out refi- I recommend waiting 6 months so you can get the most favorable terms, but you can still do it.

Good luck!

JD Martin · Answer

You never write off the purchase price at least in the way you're thinking. You depreciate the structure basis of the property (you don't get to depreciate land) over 27.5 years. So you do get to "write off" what you paid but it is over time. It makes no difference if you paid cash or got a mortgage for depreciation. Mortgage allows you to write off the interest as well reducing your taxable income on the property.

All cash on a property = more cash flow, worse ROI (return on investment). Leveraged (mortgage) = less cash flow, better ROI. But that's just on one property. If you take that money and put it on a bunch of properties you will almost certainly have much higher cash flow than all the cash in one property. If you only want to own one property, and have no other use for the cash, then not having a mortgage earns you about a 2% ROI in today's interest rate environment (not counting appreciation, which happens if you pay cash or have a mortgage if it happens at all). So that's better than a quarter percent in the bank but not by much.

Julie Sisnroy · Answer

@Joshua Emmons  I HIGHLY recommend you look at mortgage lenders who regularly deal with investors.  Of course you can get a mortgage on an investment property, you will just usually have slight higher rates and a higher down payment requirement. There are plenty lenders here on BP willing to help you.  If you are interested in another property, you can do a cash out refi, but otherwise, it's not necessary to do a cash out - enjoy owning a property clear and free!

I am not sure why you have an LLC for one property unless you use it for other business purposes.  It is harder to get a loan under LLC. Of course, there are always two sides to owning vs not owning an LLC, but it seems most say it really is not necessary.  Don't worry too much about it--there are worse "mistakes" you can make in RE!

Joshua Emmons · Answer

@Allen S. Thanks. I will try first national. I tried Northrim and KeyBank. KeyBank dropped the ball and sat on the appraisal to long and my app expired. I am currently trying to get their hard inquiry off my record as I didn’t get denied the loan, it was their mistake. I’m not having good luck with that. Northrim is the one who told me about the LLC issue and banks not lending against investment properties.

Thanks again for the advice

Allen S. · Answer

@Joshua Emmons

If you own the property free and clear you shouldn't have much of a problem putting an 70%-80% LTV loan on it.  Being owned by an LLC is immaterial.  You won't be able to get a sweet owner-occupant rate and low down payment, but it seems like that's not what you're after.  We use First National Bank and while they're slammed with work right now, things are still moving and we are working with them on one of our rentals that we own free and clear.

As for your initial question, you can never write off the purchase price of a property.  You can write off the interest on a loan and you can depreciate the property itself (with or without debt attached to it).  We could get into a big tax strategy and philosophy discussion on that topic, but I think that's not what you're after with your question...

Joshua Emmons · Answer

@Tom Wagner well I guess if I had done my research I wouldn’t of done that, expensive lesson I guess because now capital is a problem. Bank said to find an investor so that’s what I’ll try doing next I guess.

Joshua Emmons · Answer

@Greg M.they said because it’s a single family home in an LLC and I don’t have it in my personal name. LLC requires business loan and in Alaska they don’t do business loans for anything under 5plex. Currently in talks with a credit union to see what they can do, I would like to use the equity to acquire another property.

No my credit is fine and my personal income is fine.

Tom Wagner · Answer

Even if you had financed the purchase with a mortgage, you wouldn't have been able to "write off" the entire purchase. That said, I think buying with cash is foolish given the current rate environment. Interest rates are at all-time lows, why not take advantage?

Greg M. · Answer

This makes no sense. Did they decline to loan specifically because it was an investment property or due to other factors like your credit/income didn't qualify you for an investment property loan?

Joshua Emmons · Answer

Thankyou for the Advice

Paid cash, did I miss out?

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