All Forum Posts by: Albert Bui

Also it would not weigh down your credit in the future it actually helps your credit in both the view of the banks and financially.

Banks look at your financials to assess the risk of the person they are lending to and if you show that you know how to use debt smartly they will love to lend you more especially when you can show them via documentation that your able to produce potential cash flow and 45k of proceeds with out even using one dime of your own money. So Hypothetically this means if they were to give you a loan its a high probability you'll figure out a way to get this loan paid regularly.

When I review financials its very telling if the borrower knows what they are doing its like your report card as Kyiosaki would say.

This doesnt really apply to 1-4 unit lending unless if its a local or portfolio lender however mostly applicable to 5+ multi family, commercial, and business lending.

5 C's of lending Character (integrity), Capacity(cash flow or ability to service debt), Collateral (equity in property to secure debt), Capital (networth), and Conditions (economy, and external factors)

Option A:

I would say option A is better depending on the terms of the loan and if they can do it under 12 months because most conventional banks will not lend against ARV until after a certain period they call "title seasoning." This period is usually 12 months in order to use "market value." However each bank may vary especially local banks and portfolio lenders who do not sell but rather retain the paper they write.

A person may go with option B because the the cost of funds to float this project from their "private lender," might be 12% while with a conventional lender's costs they are 5.625% 30 year fixed so you save the 637.5 basis point spread between the rates each month assuming all else equal. This savings could translate into a higher return on your time since if you paid back your 49,200 and only have 20k left @12% interest lets say your month cost to hold the property is not substantially less in the absence of obscene closing costs or points.

Option B:

This may be an investors dream cash back 45k in your hands and a property with no skin in the game "infinite return," assuming you still cash flow with 120k of leverage on the property.

A tenant would be paying your mortgage, taxes, insurance, and etc while you've retained the property, received 45k non taxable proceeds from the refinance since the asset has not been sold, and potentially making some income each month if the numbers work.

120k @30 year fixed 5.625% is only about 690.79 per month and taxes and insurance I'd wager (depending on state) is probably 130 more. So 820.79 (with out property management or repairs/vacancy) would be your break even cash flow wise.

Yes 5% down is only owner occupants as of 11/16/13.

For Non owner the min is 10% down but that only applies to SFR not 2-4 units.

The mortgage insurance policy through Homepath can be very expensive especially for non owner with 10% down around 3-4 points cost either in cash or about .5% more in rate (estimated or a combination thereof). Then again where else can you get 10:1 leverage from a conventional source (with out seller financing to aid)?

Hi Mike,

Fannie & Freddie (std conventional) financing will do 5% down for primary. There are a lot of ways to finance the primary. If you have minor rehabs like all cosmetic items then you could probably use conventional financing and in some cases FHA but with FHA during the appraisal process they check everything and it can be a hassle for some investors who feel like they have to fix every tiny little thing like loose stairrails, cap the exposed wires, tighten the leaky faucets, recaulk the bathrooms, etc. Conventional financing will not require these minor issues fixed only major items that if left untended could substantially lower the value of the collateral (property in this case).

Since your hold time is minimal I would recommend 5% down primary utilizing a single premium mortgage insurance (SPMI) to get rid of that payment. This assumes you raise your rate to a point in which you can absorb the cost of the mortgage insurance. If your fico is 720+ the SPMI will be about 2 points or about 2% of your loan amount. What this means is as opposed to paying monthly mortgage insurance you can have no mortgage insurance because the rebate or money within the rate has paid for the mortgage insurance (a third party mortgage insurance company) upfront in one payment. So you'll end up with just the mortgage payment, taxes, insurance, and perhaps a HOA fee if its a condo or common development for your monthly carry cost.

In truth mortgage insurance can be paid in many ways: Single premium, monthly premium (stereotype), or even split premium which is like a hybrid combination of the first two.

Or if you can negotiate it have the seller carry 15%, you put 5% and then you won't even need a mortgage insurance policy.

There are many ways to skin the cat.

As for the 203k concern and rehab loan:

These can be some hoops to jump through however as with all answers in finance, tax, or real estate investing it ... really "depends." Thats why its hard to given specific advice unless you become a client or we know intimate deals about your scenario.

Here are some basics on 203k's (This is a FHA loan with a rehab component not conventional financing)

- depends if you're doing a full 203k (not capped can go above 35k in rehab)

- Streamline 203k which is capped at 35k non structural repairs/non major repairs (no luxury items, but can do kitchen rehab, paint, cosmetic minors)

- you'll need to have a contractor who is used to creating and devising blue prints for the work to be done. The work blueprint has to be approved by the FHA appraisal for accept compliance with the 203k program

- once the plans are approved the loan closes like any other FHA loan however if you don't have a licensed contractor who has experience in doing 203k work it can be a hectic experience. It pays for quality advice in all areas really.

As for the tax concern:

If you're buying it as primary I would recommend you use Robert Leonard's strategy for hold for 2 of the last 5 years to get up to 250k capital gain tax free or 500k if you're married, but the problem with that strategy is you may not want your profits and exposed to the market for 2+ years. If that be the case I would recommend a min 1 year hold so you can at least pay long term capital gains tax as opposed to short term capital gains tax which is taxed at your current income tax bracket (could be 25-35% depending on what you make). Your long term capital gains tax rate could be 0% if you make minimal income, up to 15% for most people generally, or up to 20% for those at 400k or over (single)/450k+ (married). Also gotta be aware of the additional 3.8% obummer tax too for investment income if you make over 200k (single) and 250k (filing as married). This is not to be misconstrued as tax advice, I am not an accountant and this is my personal experience working with accountants/CPA's day in and day out.

Owner occupied through home path or regular conventional financing is min 5% down as of nov 16 2013 (used to be 3%). As non owner if it's home path SFR then 10% down but if it's regular conventional on SFR it's 20% down min plus required 6 months reserves on subject property and 2 months reserves on all other financed properties ( 6 on each if you're over 4 mortgages up to 10 plus min 720 fico credit and higher down payments) Hope that helps good luck!

Usually properties your going to flip are distressed or in need of repair. Financing provided by FHA would have to meet their health and safety standards and any good real agent will let you know that you have to repair a ton of things to even get funding to go through but in theory yes you could do this if the home didn't have and issues at all (hvac, plumbing, expose wiring, loose handrails, electrician, broken garage, leaky faucets, etc etc) Conventional financing will be a bit looser with minor repairs but you would still need to address the major items that would cause value to be affected like plumbing foundation, major electrical, roofing, structural,Etc. So if your credit is good and you have atleast 5% down conventional is a better route potentially with less expensive mortgage insurance options.

@Shawn it all depends on when the FHA case number for your loan was pulled. This case number is the number assigned to your property address for your home loan it stays with your home loan till its refinanced or paid off. IF the case number was pulled prior to June 3rd 2013 you will be under the older FHA rules in which your MI could fall off the lesser of 5 years or 78% LTV pay down (min 5 years) If it was pulled after it could as high as "the entire life of your home loan," depending on how much money you put down.

The Servicing fee's for a 2nd home equity line of credit are around 50 dollars a year or about 4.17 per month and that is better than 300 a month in PMI. This is if you decide to utilize a second on your home to remove PMI.

The PMI (private mortgage insurance) is considered home equity indebtedness which is allowed up to 100,000 so the interest you pay on the second is a write off for any reason up to this 100,000 mark. It can also be a write off above this 100,000 mark as well if its to repair/rehab/upgrade your residence or if its used for investment/business purposes as well.

At the end of the day you'll want to balance the interest only cost of the 2nd and its net tax benefits against putting that extra money out of your pocket to get rid of the PMI because money is always financed whether you pay cash or use financing to achieve the removal of the PMI.

Either you'll lose the opportunity to earn a return on your money by paying cash or you'll lose the interest savings by paying cash.

The devil is in the details.

Last I checked the end of 2013 is the last year the IRS will allow the mortgage interest deduction which is capped at 100k income and phases out completely past 110k adjusted gross income. This deduction may or may not get renewed for 2014 so we'll see.

As an example, if you make more then this 110k limit, the mortgage insurance no longer becomes a deduction for 2013. That $300 you pay for mortgage insurance is actually much higher because since its not a deduction you'll have to use after tax funds to pay it and therefore you'll have to figure out what your tax bracket is and what you'd have to earn before tax in order to make that 300.

If you were in a 30% tax bracket the $300 monthly PMI / 70% After tax rate = $428.57 per month in before tax income you'd have to earn to pay for this 300 PMI payment.

Just some food for thought....

The right strategy for each person depends on your comfort level and a balancing of the below:

- How you want to manage your monthly cash flow inflows and outflows,

- Your opportunity costs for that money if it were reinvested elsewhere - what you're losing or gaining, are you getting ahead?

- Your need for access to that money (liquidity) for investing, lifestyle, reserves or other needs.

- Your strategy to minimize to minimize interest and tax expenses since these are the largest expenses most people will pay and sometimes its not the rate of growth/return you need to be concerned about but rather just a reduction in interest and taxes alone could have significant impact the growth of your equity and assets over time

A lot of banks will allow a second up to 90% LTV so that you can reduce your first to 80% or less allowing you to remove your mortgage insurance on your current first loan, but like many above mention if its FHA it will really depending on when you obtained your FHA mortgage because they issue new rules and changes through time. I've used these 2nds to allow investors to reposition their equity and arbitrage the capital in better performing opportunities as well, it can be a great planning tool. The downside to the 2nd home equity lines of credit are tied to prime and the max rate is usually 18%. The margin + prime rate is how you'll determine your current rate each month. Usually it'll allow you to draw funds via the first 10 years and pay only interest only and the remaining 20 it's principal interest. As for conventional financing and private mortgage insurance or pmi the general rule is if you want mi to be removed automatically with out review or appraisal you can pay down the balance to 78% of original purchase price. If you believe the market went up substantially and you believe your at 80% or less you can pay for an appraisal or do a combination of slight principal payment and order an appraisal to substantiate the value to remove the PMI. For my bank particularly there is a 12 month min timeframe from the day you close and record your loan before you can remove the pmi so each institution may vary.

Hi Cameron I've worked on a lot of these with investors. In the context of conventional lending if you purchased the property with all cash you ca. Cash out up to 70% of market value immediately up to the total cost you paid on the final HUD settlement statement whichever is less in under 6 months. Option number two you can wait 12 months and you can cash out up to 80% using market value which means you'll be able to take out all of your money in the property and the some with out tax as long as you have not sold the property. Under 12 months we have to use the lower of appraised value or purchase price/acquisition cost. Option 3 you can search for local banks and portfolio lenders who may have more make sense guidelines in the local area. Let me know of that helps or if you have additional questions.