All Forum Posts by: Clayton Smith

 I have a question about interest tracing. 

My current loan is a SFH I have had for 7 years. I still owe $75k on the current loan for this property. Now lets say I cash out refi and take out a new loan for $100k and just deposit the $25k minus closing costs into a bank account. Can I write off all the interest expense? Will interest tracing allow me to write off the interest on the original $75k that I still currently owe but not the full $100k?

I am going to consult my CPA but wanted some knowledge before hand. 

I am confused by the wording of the question. Does this mean that from point of the cash out refi you can not write of the mortgage interest on your taxes as long as you own the property? 

I have a SFH that I have used a construction loan that converts to a 5/1 ARM. I am interested in cash out refinancing, I my current loan balance is $145k. I am planning to cash out refi and my new loan will be around $185k and receive around $40k minus closing costs. I am planning to purchase another property. So how would my deduction work moving forward? Can I only write off the interest for the $145k portion of the loan not the full balance? I bought the lot with cash and had several thousand dollars of out of pocket cost, loan cost, building plans, etc, that will be very close to the cash out amount.

Also, what qualifies as improvements to the home? Would I need to spend the entire cash out amount on improvements to keep the interest deduction? 

Thank you for your help. This is my first cash out and I am just trying to get a better understanding. 

I have several student rentals and am worried about the same thing happening in my area. My thought is they signed a contract and must fulfill it but this doesn't mean it will be painless. 

I understand people are trying to help by saying list if for rent but in college towns it is extremely hard to find tenants in the middle of a semester. 

The best thing is figure out your return on equity. Take last years NOI minus any mortgage payments divide it by your estimated net of the sale, I assume you will not need to pay realtor fees but what about closing costs and repairs?

Net / Net sale = return on equity

So $700 / month CF x 12 = $8400

Even if you own the property outright you still have a pretty good return on equity.

$8400 / $80,000 = 10.5%

If you know you can get a higher cash on cash return than 10.5% then sell it. 

I have several student rental SFHs in a town with a large university. I have done well with them but in my area the competition is fierce. Crunch the numbers of what you think you can get the best return. If you decide to do student rentals just make sure to have cosigners on the lease with the students. Also renting by the room doesn't make since in my opinion for a smaller investor. Because it can create drama of roommates fighting and you having to babysit also when all the students sign one lease you have more options to get your money if one tenant leaves. Student As cosigner may not care about their credit but student B & C will probably feel differently and be willing to come out of pocket for student A to make sure they don't have a negative credit impact. You will have higher turnover but in my experience the wear and tear of my houses have not been anything major. 

thanks

I have been leaning more cash out but wanted a second opinion. 

I am building a SFH house in a college town to rent to students that I plan to hold for several years for cash flow and to build my portfolio. I financed the house with a construction loan that will convert to a 5/1 ARM at a 5.75% rate with a 20 year amortization. I am set to be complete the house by April at which time I will do a cash out refi. So my question is should I use a 75% LTV with a better rate or 80% LTV for more cash out?

The details. 

I bought a lot in August 2019 with cash and had to put a down payment to equal 15% total cost for the construction loan. All total after the construction loan closing cost, interest and other misc building cost the total build cost will be around $175k. I will owe around $142k on the construction loan. I will be out of pocket about $33k. I have talked with an appraiser and the value of the house after completion should be around $230k. I have talked to multiple banks and two local options they gave me are below. 

Option 1: 80% LTV, 30 year fixed @ 4.75%. loan amount $184k. minus construction loan $142k = $42k, minus refi closing cost. My P&I will be $960 a month but I will still have a cash flow of around $500 a month after taking into account; taxes, insurance, PM Fee, vacancy, maintenance and capex.

Option 2: 75% LTV, 30 year fixed @ 4.00%. loan amount $172,500. minus construction loan $142k = $30,500, minus refi closing. My P&I will be $824 a month with a cash flow of around $635 a month after budgeting for expenses. 

Looking at the numbers it will take me just over 7 years to recoup the 5% equity left in the deal based the monthly increase in cash flow. $11,500 cash out vs 1,632 in yearly cash flow. I am a younger investor so I will be looking to put the cash out into another deal as quickly as possible and the extra money would be very helpful finding a good deal. I am also comfortable with the amount of leverage the 80% LTV would provide. What is the best way to analyze how much ROI I would need to make on the extra cash out to justify paying the higher rate assuming I am going to keep the home for 10-15 years then hopefully trade up with a 1031?

Just looking for some advise. Thank you. 

Congrats that is certainly a great problem to have. I think you are correct in not wanting to make your payment more than than you will net once it is rented. Negative cash flow is not a good thing. I think you should consider two options. 

Option 1: Sell the house using a 1031 exchange. If the appraised value is correct then you can use the proceeds to invest in other properties to buy and hold for more cash flow. However if you are in a market that you believe will appreciate in the next few years a 1031 exchange will mean you miss out on the appreciation.

Option 2: Do the cash out refi for 60% LTV to ensure you have a cash flowing property. Then you can use a HELOC to access the rest of you equity, in most cases up to 90% LTV. A HELOC will give you a line of credit that you only pay interest on if you are using the funds. This is a great option in my opinion for two reasons. If you are looking for new properties the money is sitting in you credit account ready for same day access, so you can move quickly. If you were to cash out refi the 80% LTV you would essentially be paying for that money monthly with a negative cash flowing property.

Hope this helps and good luck. 

Also, I am currently trying to perform a cash out refi and I can not find a bank to go past 75% LTV. Are you using a local bank or national? Can you give me the name of your bank? I would love to find a bank that will cash out 80% LTV of my SFH property.

Jason, I stumbled upon your post sorry its a little late. I am currently doing the same thing in my market in Alabama with a SFH. How did it turn out? What LTV were you able to get? I am having trouble finding anyone willing to go past 75% LTV.

An OSHA agent will have some kind of official identification on him when asked, some kind of badge. OSHA can perform a random walk down of a residential home but they often will not. I work in commercial and industrial construction and in my opinion they only want to go after companies that can pay the large fines. OSHA can fine a man not tied off on a roof at least $5,000 per man per incident. That is why they mostly only go after larger commercial contractors. If they give a roofing company in a beat up van $20,000 worth of fines they know it will never get paid. That is why it is unusual for them to hassle residential contractors. But if they think that the builder has big enough pockets residential is an easy target.