All Forum Posts by: Joe T.
Joe T. has started 17 posts and replied 41 times.
Post: Exit strategy for commercial loans
- Chicago IL
- Posts 43
- Votes 11
Quote from @Isaac S.:
Loans are non taxable large cash infusion events, AND their interest payments are fully deductible.
IMHO, the strategy for commercial lending is either have a disposition strategy(exit) that is based on the loan term OR at the end of the term refinance/cashout any of the equity you have accumulated(assuming appreciation) and reinvest it in other properties, in order to diversify the built up equity from the original investment with the intention of growing a portfolio, OR have the equity cash out to buy expensive things with(stocks, yacht, beach house, RR, Gulfstream jet, etc) and let the investment property cover the debt service on that thing purchased with the cashout, depending on the greater economic conditions. Of course, more income producing RE would be my first choice and probably most on this site.
...... all of that can go seriously sideways if you have to large LTV, and your loans mature from very low interest rate to much higher and go from black ink to red accordingly because rents didn't keep pace with the difference in new higher interest loan payment.
The point is.... that if you have a completely paid off, fully depreciated asset, you don't have tax depreciation expense incentives, but if you redeploy the equity from the refinance loan into another asset, you have a larger fully deductible loan payment, untaxed inflow of cash from the refinance, and new asset with a new depreciation schedule that shelters some amount of the equity in your RE portfolio, instead of no depreciation on the initial paid off primary asset.
When done correctly you minimize tax liability, maximize diversification, maximize appreciation, maximize portfolio growth and maintain a stable cash flow with occasional large infusions.
Unless, I am missing something?
Thank you explaining the approach in this much detail. It makes a ton of sense. One question- when you say the new depreciation schedule that shelters some amount of equity in your current RE portfolio, don’t you mean shelters some of the income?
As I understand it, the depreciation helps with additional deductions from your RE income.
If not, please clarify what you meant by sheltering equity.
Thanks!
Post: Exit strategy for commercial loans
- Chicago IL
- Posts 43
- Votes 11
Quote from @H. Jack Miller:
Its really a strategy issue. I am a big fan of buy and hold and dont die. I would pay off over the amortized period, with rates being so low I would not make extra paydown payments, But use that money to invest and buy more. Every month your building equity, if you payoff the loan in 20 years and do that on several, you will be a very rich man.
The problem is that due to the loan “resetting” every 5 years, it will take much longer than 20 years to pay .
Post: Exit strategy for commercial loans
- Chicago IL
- Posts 43
- Votes 11
I have a few commercial real estate loans which are fixed rate for 5 years on a 20 year amortization schedule.
My lenders assure me that at the end of each 5 years, I can get another similar loan with the prevailing rates.
The problem is that I would be on the first 5 years of a 20 year amortization schedule every time- which means that I’d be paying mostly interest. It would take forever to pay off this mortgage.
What should be the general strategy here?
These properties are meant to be my retirement. Should I aim to get Enough cash to pay them off? Or should I sell them at some point?
Unclear what the best exit strategy is, or whether I should think of it as cash flow and not worry about the fact that I will barely ever touch the principal?
Post: Getting higher cash out refinance by selling to family member?
- Chicago IL
- Posts 43
- Votes 11
I'm looking to do a cash-out refinance to get cash to reinvest. The appraised value of the property came in lower than I wanted.
So instead of going through with the refinance, can I just sell the property to my wife at an agreed upon price and have her get the mortgage at that higher value?
This way, we would essentially get the cash back at a higher price point. Let me know if this is a tactic that people use and if it makes sense to move forward on.
Thanks!
Post: Do you have to go with bank that did appraisal for refinance?
- Chicago IL
- Posts 43
- Votes 11
Hi there,
The bank I'm working with to get a refinance came back with a lower number than I expected. What options do I have?
Can I go get a second opinion elsewhere? Am I obligated to pay the original bank for their appraisal services?
Am I able to negotiate with the bank or do they go with exactly what the appraiser recommended as a matter of process?
Thank you!
Post: Question about 6 unit deal in Iowa
- Chicago IL
- Posts 43
- Votes 11
Taxes and insurance around $5700/yr
Owner pays for trash and water and lawn/snow care which comes up to about $5500/yr.
Current tax assessed value is 125k. If I purchase at 170k, will those taxes automatically increase? I thought there need to be a formal new assessment by the county?
thanks
Post: Question about 6 unit deal in Iowa
- Chicago IL
- Posts 43
- Votes 11
Actually, left out mortgage for $800/month. So that's another $9600/yr in expenses.
That takes the NOI down considerably.
Is it still worth it?
Post: Question about 6 unit deal in Iowa
- Chicago IL
- Posts 43
- Votes 11
I wanted to get thoughts on this deal in Iowa:
6 unit side-by-side townhouses. Each 2br/1ba. In C neighborhood with minimal opportunity for appreciation.
Price: 170k
Rent: $500/unit for $3000 a month = $36,000/yr.
2018 expenses: $12000, plus property management of $3600 = $15,600/yr
Net Operating Income comes out to $20,400/yr.
Financing is on a 5 yr ballon, on 25 yr amortization, with 20% down.
I'm looking for cash flow which this seems to have. However, I'm not sure whether there is risk in taking the loan with such a short 5 yr term.
Looking for thoughts and feedback on how this should be approached.
Thanks!
Thanks for all the responses.
I did some thinking and I'm leaning towards creating an OTHER LIABILITIES account called "Property Management Payables" to hold that balance.
Then the following month when there is positive balance coming from the property manager, I would zero this out as part of that month's journal entry.
I do have an accountant, but I'm also planning to learn the book keeping trade so that I understand every aspect of my business.
Post: How to account for rental income with Property manager expenses?
- Chicago IL
- Posts 43
- Votes 11
Book keeping question - how would I record full rental income if I don't actually receive money from the property manager?
For example - For January I receive $1000 of rental income and incur $1100 for misc expenses (due to delinquent tenants, etc.)
I actually did not receive a $1000 check from the property manager, nor did I send out a check for $100. The balance was passed forward to the following month. Even though no real funds changed hands, for recording purposes I need to account for $1000 in income and $1100 in expenses.
How should I record those? If I enter each within a journal entry, what should the source and target accounts be?
Thanks!