All Forum Posts by: Andy D.

@Oleg Kio While you are (as far as I understand) correct with respect to the limit applying per item, your example of the 20 windows is somewhat unfortunate as they would not - in all likelihood - fall under the de minimis rule as they would be considered a (capital) improvement. And those still need to be depreciated over the applicable time lines for such items.

The devil remains in the details when it comes to the question of what falls under the de minimis safe harbor rules and what needs to be depreciated. A CPA will help fight that (mental) battle.

So let me see if I understand this correctly. The underlying idea of what @Chris Mason described above is to get around the usual seasoning issues connected to monies for a "down payment", correct?

If so: what the above example shows is that - since there is no down-payment amount related to the property purchase and lien/title/etc at that point - the amount deposited as collateral with the HML (or some sort of trustee) can - at the time of refinancing into conventional/paying off the HML - be used as actual down payment (of whichever percentage) for the conventional loan. This assumes that these monies (= the $20k in the above example) are seasoned by the time they are to be used as down payment/pulled out of the . But that shouldn't be an issue as those 3/6 months will have passed by then in the majority of all cases, I guess.

Let me try to visualize this somewhat. PLEASE correct me if I got it wrong! Don't want to perpetuate any idiocy here from my end...

Normal situation:

Purchase price: $100k (we assume this equals actual value of property)

Buyer/borrower: $20k "skin in the game", i.e. money in the deal itself, used to pay part of the purchase price

HML: $80k as loan to borrower/buyer, paid at closing to seller

This makes $20 + $80 = $100k as total purchase price (we shall ignore any fees etc)

Refinancing part in normal situation (mind you, property is not sold):

New owner wants to pay off HML and goes via route of conventional financing. This requires him, again, to have 20% "skin in the game", this time called "down payment". As the new owner deposited $20k during time of closing, these $20k cannot be used as down payment as they "have not been in his bank account for x months" anymore. They are, from a lenders point of view, not seasoned as there was an interruption in the possession of the funds when looking at the owner/borrower. Depending on the overall situation this is the end for a quick refinance into a conventional loan. On the other hand this is a situation that will make the HMLs happy as they can lend for longer periods of times until the owner has finally scraped together money that can be considered seasoned to then, finally, go the route of conventional financing to pay off the HML.

The "CM approach":

Purchase price: $100k (we assume this equals actual value of property)

Buyer/borrower: $20k in some sort of trust account to prove to HML that there is money which HML could access if push comes to shove, i.e. to still make borrower/buyer have some "skin in the game", albeit not as part of the purchase price

HML: $100k as loan to borrower/buyer, paid at closing to seller

This makes HML having paid the entire purchase price (we shall ignore any fees etc)

Refinancing part in "CM approach":

New owner wants to pay off HML and goes via route of conventional financing. This requires him, again, to have 20% "skin in the game", this time called "down payment". So far the same situation as above. But now there is a difference: as new owner didn't actually give away the $20k to the lender/seller he is still the owner of those funds (*) and therefore these $20k can be considered seasoned and, consequently, be actually used as down payment immediately (again, assuming that they are indeed seasoned at that point, see above). The conventional lender then pays $100k to the HML, paying off in full the HM loan of $100k. HML is now out of the picture and property is financed conventionally with 20% equity of the owner.

(*) This might actually be an issue. Because, technically, once the $20k are deposited in a trust account, the trustor (= future new owner) is no longer in possession of these funds. While they have not changed legal ownership over to the lender/seller, they could - especially from the narrow point of view of seasoning - be considered "no longer held by the borrower". Therefore we would run into in the same issue as if they were acutal "skin in the game" as 20/80 with the classic HML scenario.

@Chris: have you, by any chance, looked into that aspect with your "CM approach"?

Now I'm curious if I described this correctly. Very interesting in any case! I might need to contact you for a chat, Chris. ;-)

@Chris Mason stated the key point: REI-friendly lender. The hoops the majority of lenders make us jump through to "allow" us to make use of their services and paying them is beyond belief. If car dealers acted like many lenders do there wouldn't be any car dealership left, that's for sure!

However, once one finds the right lender who actually knows that he/she/the entity is doing (aka understanding their business) then there will be no issues with respect to DTI (or other overlays). Sure, you need to have your act together and present a good deal (which always involves paperwork) but that's easy enough, really. Especially if the lender wants to work with you as they will ask the right questions and steer you towards a mutual success. You may want to involve a mortgage broker, or simply contact some of the lenders present here on BP. With them it's safe to assume that they are REI-friendly. ;-) Good luck!

@Andy D I'm tagging myself (haha) as I need to correct myself. So far I was under the impression that de minimis does not apply to "things" put in a rental unit but rather only for items that you would use running your business such as an office desk, chair, computer etc. I seem to having been misinformed about that.

While the de minimis limit has indeed been increased to $2500 (see for instance

https://www.irs.gov/uac/newsroom/for-small-busines... ) I believe it to not even be relevant here as there is something even better: Safe Harbor for Small Taxpayers (SHST). It has restrictions (of ocurse) but it is likely that Sunny P is able to benefit from SHST. Your CPA will be able to tell you. Brandon Hall has written an excellent overview of the rules involved re expenses for repairs, improvements etc.:

https://www.biggerpockets.com/blogs/6032/41669-understanding-the-safe-harbor-rules-and-keeping-money-in-your-pocket

Enjoy!

@Sunny P. Sorry to make you unhappy but the "crap" needs to be depreciated over a 5-year period. There is - typically - no way to expense the entire amount in the year where it's bought, at least not for investors like us.

As a rule it can be said that pretty much all the stuff one, as a landlord, would put in a rental unit is 5-year property.

You really need to have a CPA take care of this or you'll run into trouble or at least make mistakes that, in a potential audit, will cause you trouble. However, to get an idea what the amounts look like you could check this out:

http://www.free-online-calculator-use.com/macrs-depreciation-calculator.html

Enjoy ;-)

My point was not about being scared or anything like that. Although some people might actually be scared, for whichever reason. My point was about it possibly factually being very difficult for some people to show up in court. Mind you, we are talking about evictions here and not something "important".

@Account Closed There are legitimate reasons to send someone else. Like, try getting me to show up in front of a judge in the US for an eviction. I don't think so. ;-)

One of the main points of hiring a PM Co is to not having to deal with the "cow manure" (trying to avoid the explicit words here ;-) ) of exactly said sort. You pay your PM good money - to do what exactly?? It starts with their incompetent selection process. To me it seems they are also "cow manuring" you... The whole story is ridiculous.

More importantly: I sense you are emotionally involved. That almost makes this a lost cause. Detach yourself immediately from any emotions (I know, might be difficult, but this is business!) and tell your PM Co to get their act together and handle this tenant issue.

Fixing the damages is a different story, and there you might want to get involved since - again - the PM Co seems to be incapable of handling this properly.

Finally, as has been said, start looking for a new PM Co. Good luck!

@Robert Melcher I like that! good one.

@Wave Taylor I know nothing about your (current) personal (financial) situation. But you may want to look for a mortgage broker that is knowledgeable about financing for (and consequently transactions on) investment properties. These people will have contacts and are able to find you a lender easily. And more importantly, they will be the intermediary between you and the lender and will be able to clarify many things using "lender language", making things - typically - much smoother for you.

That's not acceptable, especially if there are no issues raised by them requiring remediation (which could justify that period). They either don't take you seriously or there are issues that they, for some reason, don't want to get back to you about and hope that you just "forget about it". Or, they lost your stuff and don't want to admit it...

Imagine you want to buy a place - which seller would wait 2+ months for you to get your financing together?!