All Forum Posts by: Tim Delp

The rental income from your current rental property is going to be obtained by looking at the past 2 years of tax returns (2011 and 2010). it is not going to be what you actually made but what you claimed on your tax returns after all expenses. Many times what an investor makes and what they claim are two different things. they will allow you to add back any depreciation. If you have claimed rental income on those two years they will average them to determine your positive or negative cash flow. It is a pretty simple calculation in looking at gross income, minus expenses plus depreciation.
If you've claimed this for the past two years that should establish your history of managing problems.
As far as renting out your current home and buying a less expensive home: that is at the underwriter discretion. There are multiple possible issues/red flags. Buy and bail being the first and then the 2nd is owner occupancy. Anytime someone is going from a more expensive larger home to a less expensive smaller home an underwriter wants it to make sense? Also how long have you owned your current home? If you bought it a year ago and are now wanting to buy another primary, underwriters don't want you buying a bunch of primary residences when your goal is simply to avoid getting an investment property loan for your acquisition of additional investment properties.
Next issue is you just sold your business and it sounds like your sole source of income is from the business you just sold. Most underwriters are going to assume they have kept you on for a period of time and this new position is likely to end at some point in the next few years if not sooner as the company no longer needs to retain you for the transition.

Just my thoughts on why you are seeing the difficulty you are facing.

I'm no expert but I can tell you a difference as you hit on is simply the difference between someone lending you money and providing someone an equity stake in your business or property. It also has to the solicitation of funds. I believe you have to be careful in both instances in how your are solicting for funds. There are stiff guidelines for private equity deals involving only having qualified investors and strict guidelines on solicitation for involvement in the deal. It appears that it all needs to be word of mouth.

You need to read your entire contract, you are seeing this more and more that they are throwing these fees in contracts. It could be buried in the fine print of the contract, it should have been disclosed verbally to you as well and if you feel you were never told about it then it is between you and the agent and if you are buying more properties I would think the agent would help you out.

Sounds like you are putting yourself in a really good position. I agree with many of the posts thus far and I think some level of leverage would not be a bad thing. With the high disposable income you could add some leverage at 50% Loan to Value and increase the number of homes you can buy at today's value, still be in a good cash flow position and get to the number of homes you want to own in the end a lot faster and hopefully have a lower average cost. Once you own the number you want you can then aggressively begin paying down the mortgages.

You also would get the benefit of having some interest rights off to offset all of this rental income you are now going to have to claim on your tax returns.

Good luck

As mentioned above the key is going to be do whatever repairs are needed prior to your appraiser for your loan getting in the house. Fannie Mae doesn't know what is wrong with the house and neither does your lender until they get the appraisal, sounds like a few bucks spent on fixing the minor things and you are in good shape.

Once the appraisal is done then you are most likely needing licensed individuals doing any of the work.

I know you are just looking at this from an academic stand point but wanted to throw another consideration as you are looking at trying to get 'passive rental' rental income in to a deferred tax vehicle. Passive rental income does not require you to pay social security tax since it is not earned income/wages. In order to put money in to a retirement account it must be earned income. If you convert your properties to a more sophisticated s corp or something and claim it as earned income you are now self employed and would have to pay social security tax on that income of close to 15% all to then get the income in to a tax deferred account. I'm sure there are some ways you might avoid some of this but I would imagine whatever amount you are wanting to get in to the tax deferred account at a minimum that amount would need to be considered earned income and thus you pay social security on that amount.

There might be times where this is beneficial if you are in a very very high tax bracket but it sounds like you have or are about to have no earned income and not sure about what you will be receiving in retirement in terms of pension, ssi, withdrawals from taxable ira etc but it sounds as though you might be in a low tax bracket to begin with and not worth any of the hassle to do anything complicated like setting up s corps etc.

Do you just own the 1 property, what is the estimated annual positive cash flow after depreciation, taxes and insurance and other expenses?

@ Steven Hamilton:

Not sure if you read my entire post as I'm not an advocate for cash value or whole life insurance. As I mentioned in my post if you are making good returns, let's say in excess of single digits on cash purchase I think an investor needs to fully think about the tax advanatages of deferring income taxes in a life insurance policy that is going to limit their investment options and their returns.
As I mentioned what makes sense for this individual posting the questions depends upon their personal preference first and foremost and then from a numbers perspective it would be good to understand exactly how much income are they talking about from this property, what is their marginal tax bracket and what are the investment options they are considering for this cash flow they are receiving.

This is somewhat of simply a math problem and then the answer will be the returns and tax implications are better with a mortgage but you have to ask yourself which allows you to sleep at night. First I would suggest you run the numbers assuming you buy with a mortgage, assume 20 to 30% down, if the property can not cover your entire debt service, taxes and insurance I would suggest you really think if this is a good rental property or not. Once you look at the numbers that way if you decide you want to pay cash as a personal preference that is up to you. Also you need to factor in your current marginal tax bracket, while paying a high tax bracket is a good thing in the sense that it means you are making money if you can manage your taxes now by having some offesting expenses of mortgage interest and when and if you sell the business and/or are in a situation in the future where you taxable income is lower then it might make sense to have the properties paid off free and clear

Not sure how much income you are actually receiving once you factor in any expenses that you get to offest the income such as (taxes, insurance, repairs, mortgage interest, and depreciation) Maybe you paid cash for these and have great cash flow with no mortgage interest deduction. As many have mentioned you could open an IRA and simply make a contribution to the IRA that would offset some of the income. There are some ways that you can use life insurance and get some benefits for deferred taxes and they will talk to you about how you can borrow against the life insurance when you need the money and essentially never pay taxes and then you will have a death benefit that pays off the loan when you die and leave your beneficiary with whatever is left and never having paid taxes. Problem with most real estate investors is that if you are buying properties that are producing such great returns for you to produce this income that you are wanting to defer taxes on you also need to consider the investment options you will have in that life insurance vehicle or any other vehicle. I certainly wouldn't want my money deferred into an account that it going to average low single digits if I had the abilty to buy great cash flowing rentals producing well in excess of that.
Also it sounds as if you are no longer employed in w-2 position so what is your taxable income and your marginal tax bracket: Are you in a high tax bracket where it makes sense to defer all this income?
I see people doing everything to avoid paying taxes and at times they are not in a real high marginal tax bracket to begin with.

You can typically look at a cash out refinance based upon appraised value once you have owned the property 1 year. Also be careful about always looking to take all your cash investment out of your rentals, good way to get over leveraged, nothing wrong with having a little skin in the game and some good cash flow to protect you when markets change.