All Forum Posts by: Jimmy H.

@Steven Hamilton…I do understand that is a concern. But, I see it, as many things in life, as a very grey area. Two investors come in for a commercial loan, all things equal except: one has detailed expenses to a granular degree, the other is less organized and did not claim some repairs, etc - is that latter committing fraud? I don’t think so; certainly something to be wary of though.

@Al Williamson…thanks Al. It may sound terrible to some, but I believe you must always be concerned with your own self interest; and you can be sure the Bank will be doing the same.

@David Beard…you are correct, it would most benefit someone with negative cash flow. My cash flow is positive, but if I only claimed say my depreciation and utilities cost, for example, it would serve to increase my DTI in any event. Regarding maintenance vs. capitalization – yes that is very true. But I was thinking of more overtly just not including some of my maintenance expenses, or not claiming them all, not claiming advertising, car expenses etc. Those things are generally up to the discretion of the taxpayer to claim and I doubt many banks would call upon me to note those expenses. I would only do this a couple years and then I would become conveniently more efficient in my recognition of expenses for tax purposes. I figure paying a few extra thousand in taxes for a couple years early in my career is worth the benefit of potentially being able to acquire more assets at depressed prices, depressed interest rates. I currently have a day job with a salary and my net income is positive, but increasing my DTI in this manner will still allow me to obtain more credit.

@Charles Perkins…good point and I do plan to claim depreciation as I do not want to cause myself any more headache down the road. Alternatively, there are many one-off or period expenses that I could "overlook" each year that should bolster my DTI handsomely. Thanks for the insight though.

I think this is probably an overall good idea. As we draw closer to tax season I will play around with the numbers myself and try to gauge the efficacy and overall cost/benefit of pursuing this strategy. Perhaps I am being greedy and greed has been the downfall of many. But from a financial and investment perspective, it seems prudent if I am comfortable with the incremental risk that the additional debt would entail.

Wanted to follow up post to report my success: the property appraised for $95k on the dot, as I had expected. With an investment of $70k and the ability to cash out 75% of the value,I am now able to pull out an extra couple thousand dollars - most of which will cover closing and transactional costs. Nonetheless I was essentially able to acquire this property with $0 net investment.

I actually just tied up another property and plan to pursue the same strategy. This one should have enough margin for me to cash out around $15k - does anyone know if I would have to pay tax on that gain as income? I know you don't if it is your personal residence, is the same true for investment properties?

Thanks for the response Charles.

I do not plan to partner or sell, rather hold these rental properties on my own for an indefinite period. Keep in mind that I would only be pursuing such a strategy for a couple years; by the time a partnership or exit strategies are a consideration for me, I will have reverted to using all deductions to the utmost. The intention is only to give a temporary boost to my borrowing power while early in my career.

Regarding the IRS, I think they will be the last party concerned with potential overpayment.

That leaves lenders (from your list) as my only concern. This entire strategy, however, is intended to be used to obtain leverage. So, the worst case scenario would be showing a P&L, schedule E, or the like and have an underwriter specifically ask for certain expenses to be shown. In that case I am at least minimizing expenses shown to that underwriters' lowest standard, and thus achieving my stated purpose; some underwriters will be more lenient than others and I will take this into account when partnering with various financial institutions.

I'm sure this could backfire on me, but I have yet to consider any scenario that would warrant not pursuing this strategy. That is, the pros still seem to heavily outweigh the cons.

I had a funny thought pop into my head as I began to prepare for the upcoming tax season: should I intentionally pay more taxes (by not taking all deductions/credits claimable) so as to be able to leverage that income into more investments?

I am at the beginning of both my real estate and professional career; now that I have a decent bit of rental income to show, I am thinking it would be most beneficial to me in the long run to overpay in taxes, showing as much income as possible for two years or so (two is typically what most Banks require). Thus, I would be able to leverage that income into greater investment capital for myself.

Sure, taking on leverage entails risk and I recognize the potential perils of it. But, I have a background in Finance and if I'm comfortable with the risk being taken with these investments, why not work with these low rates and depressed prices early in my career and get the proverbial "snowball" rolling down hill ASAP?

I recognize there are upfront costs in overpaying the IRS, but the long term benefit, with regards to the time value of money and the like, seems greater.

Thoughts?

@Jason...I understand your aversion to debt; it does entail risk. But with rates this low, I am intentionally leveraging up my balance sheet as high as possible. I see this as a great inflation hedge due both to the real nature of the asset and the fixed debt. And even if my property values drop, those gains are unrealized and I don’t plan on selling – rather holding. The real risk is in not cash flowing and having some hiccups/vacancies that make you end up missing payment and have the whole house of cards come crashing down.

@JScott...Sorry I wasn't clear enough but yes, I plan on switching to a renting/landlording strategy. I recognize that I will incur closing costs and the like and will need to rent it out to clear the PITI and other costs; the money is not free, of course, as you said. I'm also a real estate agent and essentially get paid 3% to purchase property which will help offset those initial transaction costs.

I am aware that landlords refi and I am sure many have been doing so with the changing rate environment. But, I am more talking about an acquisition strategy that entails buying in cash, rehabbing a bit, and then cashing out with a mortgage - when done correctly you may even be able to cash out more than your net investment. For this particular property I think $800 is certainly achievable, and I like to be conservative. Even if my cash flow is not huge, my ROI won't be tremendously low because if done correctly, my investment will be $0.

@Chris....Good point, perhaps the lender told me ten; it’s either 10 or 12.

Either way, from what I was told, the first four mortgages require that you have 2 months PITI reserves while mortgages thereafter (up to the 10 or 12 limit) require you to told 6 months PITI as reserves.

While this does require some cash, it'll be a few years before I'm acquiring that 10th mortgage anyways.

I would, however, like to hear more expert opinion and/or anything I might be overlooking.

I'm close to completing my second flip, I just listed the property on my local MLS when I had an idea:

Why not cash out refi for more than I have in the property.

I bought the house for $40k in cash, I have less than $70k in it and it is worth about $95k.

At 75% LTV, I can cash out $71,250.

So, If I buy the houses right (cheap enough) and can fix them up for less than 75% of the appraised ARV value, why not cash out refi until I have the max number of mortgages and maybe even get paid to purchase homes.

Most cash out refi's require that you've owned the property 6 months, will loan at a max LTV of 75% and my lender will even include 75% of the rents in your DTI calculation if you can simply show a lease. With rates so low, PITI is rarely more than 75% of monthly lease, so DTI is never a restriction.

You can only have 4 mortgages traditionally, but new rules allow you to have up to 12 if you can hold sufficient reserves (6 months PITI for each).

I know it takes a bit of cash/capital up front to get started as I have been buying and renovating with cash. But has anyone pursued this strategy?

Anything I might be missing? Seems like I could potentially get paid to amass a portfolio of 1-4's.

Jon,

Where did you find those cabinets: big box stores by order, small cabinet manufacturers, big box store in-stock cabinet boxes, the amish?

I agree that installing them yourself and just finding good raw material (cabinets) on the cheap is the key.

If you already have gas, use gas - it is more efficient and cost less to operate (if you are paying the utilities). Plus you avoid the potential cost of pulling a new line to service the electric one.

If you already have electric, i'd stay with electric.

Vic is spot on. Bill Gross is a smart man but even he, nor anyone else, can know with certainty what markets will do - he is trailing market returns this year.

That said, you can buy dividend stocks that will ensure your return will be a certain %, if you buy and hold long term (with some fundamental analysis to ensure the safety of that dividend). I just bought into NYB and am earning an 8%+ return per year, and with enough time I will make a capital gain as well.

Relatively speaking, I see more opportunity in real estate, with depressed prices and interest rates, than I currently do in the stock market. A bit of exposure to each is wise, just adjust what proportion of your overall portfolio you allocate to each based on opporunity.

I would continue to collect rent from unit 1. I would tell unit 2 occupants that it is their business how they pay the rent in FULL and continue to collect rent from unit 2.

Then I would not renew their leases. Simple as that, no hassle, you are not obligated to be detective here, just collect your checks and do a better job of screening than the previous landlord, the next time around.