All Forum Posts by: Brian Adams

@David Beard

Not at all - I am happy to hear more. The feedback has been great and I never expected so much conversation on this topic. It is all about developing and learning.

For my four properties, gross rent, fully occupied, no expenses, is $5435/mo. Total PITI on the same four properties is $4194/mo.

So, 30% (I manage the $2290/mo fourplex myself, so no management fees on that one) is $3804.50, hence my earlier stated roughly $400 ($389.50) loss a month. A 50% rule assumption increases that loss (or my "home ownership savings account contribution") to $1087 a month.

So, if I understand the 50% rule - it counts taxes and insurance as expenses, just not the PI part of PITI? That would change the math quite a bit. My 30% is budgeted just for maintenance, vacancy, and renovation down the road (I expect to take over property management of my Killeen properties and really get into that side of the business).

@Michael D.

You are absolutely right about renting. And that is why the two towns I own in (Lawton, OK (Fort Sill) and Killeen, TX (Fort Hood)) have such high rental numbers (about 2/3rds of either town are renters). The biggest barriers to owning are the reserve requirements and downpayments, but if you can manage either, which to date I have, I have just felt like it would be advantageous for me to accumulate properties at owner occupied rates and downpayments (especially advantageous on the fourplex). All my 30-year fixed rate loans are sub 4.3% and I hope, with a 30+ year horizon, that will be a big boon in the future (especially as inflating our way out of the national debt becomes America's only option).

Thanks again for all the input.

Thanks to everyone for the help. The picture yall are painting is a little depressing - particularly the loan fraud bit. But better to learn the reality now than later. I only discovered BP a couple months ago, and no doubt it would have helped five years ago. I am definitely highly leveraged, though I believe my current income can support it. And I would still like to close this house we have a contract for, though, and not have to rent. This will be the last house for a few years.

Based on no appreciation, and all other expenses and rents keeping pace with inflation, my 30 year annualized ROI I computed at a conservative 5% (with 30% vacancy/occupancy/rehab costs; 40%-50% would impact that number a bit). But I am not throwing money away in rent. That is my investment logic. All the houses are in Lawton, OK or Killeen, TX, not ideal investment communities in my judgment (low appreciation, few distressed homes, but strong rental markets). I do consider these "nest egg" homes and not so much an investment strategy. I would like to do proper investing at some point, and realize the model cannot work for that (my sacrifices from my military salary alone keeps this possible).

Tax accountant definitely noted. I wanted to do as much of it myself so that I could stay familiar with the real estate tax implications. I have been taking depreciation on all my homes - I just deliberately held off beginning depreciation on the fourplex alone because I had already negated my tax liability to zero and thought I could begin depreciating it in the next year, unaware that those expenses could roll over between tax years.

Wow, thanks.

I had the impression depreciation was an optional expense from the get go, and therefore its commencement date equally optional. And knew nothing about rolling unused depreciation. I will have to study up some more, especially for next tax season. Or get an accountant. Good info.

Making notes to ask my broker Monday. Will ask about how the cash flow is annualized, especially after I fix my return with my 1040X.

@Ned Carey - I have read the 50% thread on the Landlord forum before, though I think I misunderstood on the first reading. You are right - I may have to reconsider my savings. All but one of my properties is less than 10 years old and I haven't had many major issues. But I may not be saving for the long term rehabs well enough yet.

@David Beard - the additional payments to the seller were very strange. FHA on a fourplex, but with a final appraisal $12,000 below contract price ($177,000). I was convinced that the appraisal was low and wanted to make the deal work without tripling my closing costs, and the seller wouldn't budge (the fourplex address is 4201 Alan Kent Dr., Killeen TX in case interested). Your ideas are definitely worth looking into. I originally did not depreciate the fourplex at all because my tax liability was already zero (due to six untaxed 2012 months while in Afghanistan) and was going to use a 2013 date placed in service for depreciation. So I am unsure what date the lender would be using, other than likely the closing date. Including the three months income would make a positive NCF for that property, 2012, so I will definitely be doing at least that much, for both legal and financial purposes.

Does anyone know where I can review the detailed guidelines of a Fannie Mae conforming loan with respect to different requirements like the 30% equity, 6 month reserves, etc? I don't doubt they are requirements, but just to see if there is anything else in there I can avail myself of.

Thanks to everyone for the help. It certainly helps to put things in perspective.

@ Ned Carney - Thanks for the info. Especially on the tax issue - it just did not even occur to me to count the rental income at the time as I never actually saw that money. However now that this situation has arisen, I realize that probably completely wrong from the get go, so time for a 1040X anyway, regardless of these new issues.

On the lending - I am not complaining. I have had a good run so far with accumulating my properties with owner occupied financing (especially VA, of course). Being military is one of the only methods I can think of for pulling this off. But indeed, this will be my last owner occupied property for a long time for a variety of reasons, lending difficulty foremost among them, and it will be time to transition my real estate ventures to investor loans.

As for breaking even, I only count for myself 80% of the rents in that math for properties I manage, 70% for those that I have property managers for. That is 10% maintenance, 10% vacancies, and 10% management if applicable. After that and before tax benefits, I lose $400/month on my four soon-to-be rental properties. That number should improve with time and as rents/home values go up. However as for now I see it as putting $400/month in a home investment account that will pay off in 30 years with four homes entirely owned by myself.

Of course, my assumptions are still quite generous relative those of my lenders.

Hello BPers,

I was hoping someone might have a recommendation for my financing problem.

I am a military investor who buys a house at each post I am stationed at. With a deployment, that has meant I am now seeking to buy my fifth house in five years, all owner occupied (two VA loans, two FHA, seeking conventional on my fifth).

I am in contract for a new construction in Killeen, TX, however my lender just notified me after turning in all my docs that I am clocking in at about a 65% DTI, and without lowering it to 45% the deal will be kaput. (That is about $1800/mo more salary I have to have, or less expenses of course). This is not my real DTI, of course. After tax deductions I am breaking even or so on my properties. This is just the lender math.

My problem is tax year 2012. Of my then 3 houses, one was a fourplex I bought that year in July. The appraisals were coming in at ridiculously below market value (contract price $177,000, first appraisal was $150,000 - finally got the appraisal to $165,000) and I didn't have/want to get that all out of pocket. So I bridged the divide by giving the seller three months of rentals AFTER buying the house. The problem is, for 2012 tax purposes, that looks like three months of vacancies/expenses and therefore kills my DTI.

Another of my three houses had four months of vacancies for repairs and other considerations. So, bottom line, my DTI is sunk.

They will not count ANY rental income for my current home, #4, because I don't have a lease (still living in it) and do not have 30% equity. That would make up half ($900) of the income shortfall ($1800).

My lender's recommendation is that I amend my 2012 tax return to represent as income the three months I paid to the seller and pay the additional taxes on that amount (a negligible $383), as well as pay off a car loan ($6000 outstanding balance at 0.5%, that is free money I would rather NOT pay off with investment reserves). And speaking of reserves, the $6000 would endanger my six months mortgage reserve requirement ($41,000) which I am now only just meeting. My lender said even after doing these things, final approval would not be a sure thing. Not a tax expert, either, but I might have been supposed to count the three months' income as income to begin with. Forgive me, IRS. Time to get an accountant.

Where can I find the Fannie Mae guidelines to get into the weeds of income eligibility, DTI, six month reserve requirements, etc? Is there any way I can count home #4's rental income? How much of this process is lender specific (as in, are these lender policies or Fannie Mae policies?)? Is a nonconforming loan at a slightly higher rate an available/reasonable option? Any other financing recommendations?

Also, totally unrelated question. I have found very little on the Conventional 97 LTV loans. For owner occupied, why is this not more common and the standard?

Thanks BP - tried to keep it as succinct, complete, and interesting as possible. We are supposed to close September 16, and I am not excited about the prospect of renting.

I own a fourplex, and would like to sign a contract with one of the residents to manage the lawn care.

Instead of discounting his rent, I want it to be a separate arrangement, a separate contract for lawn care. He pays his full rent; I pay him monthly for lawn care.

What are typical terms and prices for this arrangement? I figure mowing every two weeks and watering, however but what about during the winter months when the grass is dead? Would pay be per mowing? And how might the expenses of watering be typically compensated? I do not see any online articles or resources that describe a typical arrangement.

Thanks much, BPers.

Makes sense. Thanks. I was just alarmed when I was totaling security deposits for larger property managers and contemplating how much money is ultimately sitting relatively idly in an account somewhere. I thought sophisticated, larger managers might have a means of making some additional use of it.

I had in mind more taking any return from having invested money and putting it back into the company, either in higher employee compensation, more/better services, or reduced management fees, etc. And 10 properties is too few to sensibly do any sort of thing. Rather, I had in mind full, mid size management companies with, for example, 200 units. Averaging $500 deposits and 10% vacancy cost, and that is $90k. A 3% annual return on $72k of that ($18k (20%)left on hand in cash to service departing security deposits) and you have $2160 a year more as a company. Not sure if that amount means much to a company large enough to handle 200 units (3-5 employees), but that would make for a quality Christmas bonus or something, I suppose. Or suppose the return were 5%? $3600. Or average deposit $800? $5760. That is 2 or 3 months office space rent.

I just wasn't sure what most management companies might do with their deposits and thought I would see if anyone knew. It sounds like savings account or, in some cases, CD is the answer.

I did not see a statutory definition of "normal wear and tear" under Florida laws after only a very brief search, however the legal definition in Texas is:

"Normal wear and tear" means deterioration that results from the intended use of a dwelling, breakage or malfunction due to age or deteriorated condition, but the term does not include deterioration that results from negligence, carelessness, accident, or abuse of the premises, equipment, or chattels by the tenant, by a member of the tenant's household, or by a guest or invitee of the tenant (Tex. Prop. Code §92.001).

But, more helpfully, Bill Gulley is right on.