All Forum Posts by: Aaron Knoll

Two questions, for those in the know:

1. I currently own my house in full, mortgage. It would appraise at roughly $300k.

I'm considering buying a new property (currently rented out), refinancing this house by taking out a $180k loan on it. In addition, I'd take out a smaller mortgage on the rental property. 

When I read the IRS rules, my understanding is that *any* loan used to purchase investment property can have interested/points deducted from rental. So in theory, I could deduct both mortgages' interest from rental income on the new property -- is that correct?

Next: sometime 2--3 years from now, we would occupy the rental house and rent out (or sell) our current house. Would writing off *both* mortgages from the new rental investment prevent us from writing off either of them on our current house, should we ultimately rent that out?

2. How is building cost (for depreciation) assessed? Is it based on tax value of the property, or on "cost of building replacement" for insurance? Or neither?

Thanks! 

Guys, I got a weird question.

I noticed the nationwide bubble is really centered on Class C properties -- exactly the "middle class" properties that were hammered so hard by the last financial collapse, which are also the greatest in demand (due to "affordability"). 

On the other hand, if you look around, you can get some really good deals on class A-B properties -- especially ones that need a little bit of work. It has gotten to the point that many class B properties are now cheaper than class C properties. 

I am considering buying a higher-end class B property in Salt Lake City (currently rented out), holding it for a few years, then occupying it and selling it. If we're all doomed in the next 1--2 years, is this a bad idea? Should I just stockpile cash?

What happens if you depreciate a rented-out SFR, then move into it to occupy it for at least two years as a principal residence and sell the property? Do you have to pay recapture? Can you use the $500k allowance on profit to eat into the depreciation cost?

@Jeffery Breglio, thanks for this. One challenge here is that (1) I have a wife and kids who need a home and (2) my day job is busy enough and I'm not sure I want to get into more "creative" real-estate investment, beyond buying/owning 1--2 SFR's that turn a tidy profit and occasionally need me to come and fix a toilet. Also -- I could be wrong but $320k (as nice as it is) is probably not enough to start a self-sustaining real estate empire and retire.

@Jim H., thanks for this. It does seem like a good deal -- maybe just not a particularly high-performing rental! My plan is roughly like this:
- rent out the Olympus Cove house for a few years, stockpile income
- do repairs and deduct them for tax purposes
- in 1.5--2.5 years, move in (it's in my kids' school district)
- rent out my Sandy home for additional revenue ($1700-1800/mo)
- or, sell Sandy and use proceeds for more investments
The worst thing about the deal is I'd have to get an investment grade loan on Jupiter, which is about .25 pts worse than what I could get as a principal residence. On the other hand, rates are really low (2.625% for a 15-year fixed). 

@Quintin Mortensen, that's a good point. There are certainly people who move to SLC for 2--3 years, have the disposable income, and want a nice place (though not always one that big) , knowing they're not there permanently or don't yet want to buy. That neighborhood (Olympus Cove) has very good schools and is usually in high demand. But I agree, the market for that clearly won't be as big as the market for smaller, more affordable properties. 

I also have a strong preference for single-family properties for liquidity: I do not want to own apartment complexes or even duplexes; I prefer to deal with a handful of tenants in properties I can sell easily if needed, even if that means lower return. 

Also -- it's not like lower-end rental properties at the right prices are falling from trees in SLC (especially closer to downtown). The closest thing we found was a 2000 sq ft $280k home in Canyon Rim that might rent out for $1800. On the other hand, we'd never want to occupy it and sell it. That said if you can recommend a wholesaler to show me the numbers and how I'm doing it wrong, I might bail on this offer. 

Thank you all for your feedback!

@Jon Holdman: my plan is to buy now and hold it, and use the rental to subsidize some repairs. Then, when the current tenant leaves (probably in 2--3 years), occupy it myself and rent out my house in Sandy. Also, my kids go to that school district, and the extra space will come in handy when they're teenagers. But, it is definitely a stretch so I need to think carefully.

The rental currently has a PM (costs $150/mo) but I plan to fire them as soon as the current lease is up for renewal. Honestly I can do a better job myself, I live nearby, and previously managed the rental of my Sandy home for 5 years (while out of state, no less!).

Right now I have 100% equity in my Sandy home, which I don't expect to appreciate (much). I also have no desire to play dice with the stock market This Olympus Cove home is quite a bit under market ($80/sq ft in a neighborhood where prices are typically 150/sq ft) and has good appreciation potential if I manage to fix the key issues (a chopped up basement, dated carpet and wallpaper). 

As a pure investment, it's ok but I could probably do better. That said, this is clearly the best deal (for my needs) on the MLS in the last 2 years. Assuming I put nothing into it and took out 15-year fixed mortgages, I'd be making the equivalent of 10% ROI on an investment of ~$160k from my Sandy home -- but with -$300 negative cash flow (-$1300 if I move in and rent Sandy). With mixed 15-year loan and 30-year refi it's more like 8% ROI, and I break even in cash flow. With all 30-year loans it's more like 5%, but positive cash flow (break-even if I move in). My day job is great, I make $5400/mo, I'm hoping for a promotion, and my wife plans to go back to work as a lawyer in the next 2 years. But bad things can always happen.

So in short: this sounds like a possibility, but I wonder if we're in a bubble right now and if I should be wary of buying anything (even if it seems like a deal compared to the other overpriced crap on the MLS).

@Blair: Thanks for this. How do the A,B,C,D F letter grades work? Where would this home fit in?

@Bryce: what would a pro do? My sense is, this house is too big to justify the time investment of many flippers (thus, why it stayed on market and is selling for roughly half the price/sq ft).

@Karyn T.: One reason I like this property is that taxes are oddly low at <$4k. (I think they don't count attic square footage, or assess it at a much lower value). Insurance is a bit higher than I'd like, though (Farmers quoted me $1.6k /yr). I'm getting the inspection report next Tues -- on the surface the most expensive (big) repair items are the shake roof and deck. The occasional toilet/sink repair isn't a big deal for me, since I live 10 minutes away. 

I'm interested in getting into SLC area real estate investment, and would greatly appreciate advice from those who know the area. 

1. Is now a bad time to buy in the SLC market, in general?

2. I have an offer on a nice 5800 sq ft house in Olympus Cove for $480k which probably needs $50k of work. It currently rents for $3k / mo but that could go up. It seems like a reasonably good buy to me, but I note the rent is way below the 1% rule. Also, I'd have to finance this by mortgaging my current home in Sandy (which I own in full, worth $320k). Other homes in the neighborhood go for far more ($600-700) for less square footage -- I suspect this one stayed on the market because it had an odd basement and needed some work, but the fundamentals look good. 

I'm getting it inspected next Tues and want to know if I should back out, or if that seems like a good deal?

Thanks if you have recommendations!

-Aaron