All Forum Posts by: Marco Bario

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Good point Peter. When I'm selling a partial to a less experienced investor, I'd prefer to manage loss mitigation should the loan turn non-performing. In fact, as the remainder interest holder - I'm in 2nd position to the partial buyer. Therefore I'm especially motivated to receive a full payoff or help the borrower to perform. 

When buying partials, I apply a similar principle and would want to manage loss mit should the borrower fail to perform. 

@Galen Ikonomov -

Great response. Although I’m not a fan of ballon payments. I’ve received too many calls from buyers and sellers finding that the Moore’s Law of real estate seems to make them come at an inopportune time. 

If the seller insists on a balloon, at least try to negotiate an option to extend.  

@Monserrat Zitle -

I see your post has a location tag for Riverside, CA. There's a great real estate club out that way - the Inland Empire Real Estate Investment Club. I'm sure you'll find lenders and other resources there. 

Also, check out LAREIA.

@Jordan Woolf -

It sounds like what he's calling a down payment and interest are actually option consideration. 

I recently included a tidbit about the "10 for 12" in my weekly seller financing newsletter. It generated good responses and questions, which made me think to share the topic here:

Start with the assumption someone has a note which pays $1,000/mo. They need quick cash and agree to sell 12 payments for $10,000.

In the financial calculator it looks like this:

• You give $10,000 now
• You receive $1,000 for the next 12 months
• Your rate of return (IRR) is 35.07%

It doesn’t matter if the note payments are $1,000 per month or $1M/month, the return is always 35.07%.

Another use for the same concept:

Your landlord is always complaining about money. Your rent is $2,250 per month. You offer to pay 10 months' worth of rent upfront in exchange for living in the home for 12 months. Your savings? 35.07%.

A few variations:

• "11 for 12" = 16.38%
• "20 for 24" = 18.16%
• "5 for 6" = 65.66%

@Cody Smith

Section 121 of the IRS code allows for a capital gains exclusion of up to $250K if single, or $500K if married when selling a residence you've used as your principal residence for 2 of the last 5 years. 

You can learn more by reading IRS publication 523 and by consulting with your tax preparer in advance of the sale. 

These days there are more and more municipal regulations that make me look elsewhere. 

For instance, where I live in Los Angeles County, there is a post-pandemic eviction moratorium extended until June 2023. In other places, annual rent increases are capped at low numbers with no allowances for inflation or rising costs. Oxnard, CA recently passed a 4% cap on annual increases. 

@Robert Wood -

You've dipped your toe into a very deep topic. Owning rental real estate provides:

Appreciation
Depreciation
Amortization
Income
Security

and more...

Let's say you place $50K down on a $200K property. You borrow $150K.

Starting out, you'll pay Schedule E income tax. Sched E income is taxed at a lower rate than ordinary (W2) income. The Schedule E form allows you to deduct expenses such as interest and operating expenses. Also, you'll have the opportunity to claim depreciation which further reduces the taxes you owe.

If you'd paid cash for the property, you'd generate more taxable income because there would be no interest deduction. This is the only tax difference while owning and operating the property.

The biggest advantage comes in the form of Cash on Cash return:

By using leverage (debt), you only invested $50K cash but may have earned $12K after interest and other expenses (excluding depreciation) in a given year. $12K/$50K = 24%. Your cash on cash return = 24%

If you paid cash and earned $18K after operating expenses (no interest), your cash on cash would only be 9% ($18K/$200,000K), and your taxes while operating the property would be a bit higher without the interest deduction.

As I said - deep topic and every situation is different. I like to learn as much as I can about the tax code. It makes me a better investor and there are times I can refer to it when working to acquire assets from others. I also rely on my tax advisor, and always recommend others do as well.

@Katie Ann Mangan -

The ballon is risky for you. Who knows how your property will perform, what personal things may come up for you and your husband, and what the world will look like over the next decade. I'd try to avoid it, and if you can't add the option to extend the ballon for a fee.

The seller will pay capital gains taxes each year on the amount of capital gain income they receive in that specific tax year. For some light reading, I highly recommend IRS publication 537. ;)