All Forum Posts by: Account Closed

Consider a 1031 Exchange to defer paying capital gains. In simple terms, your gains get transferred to the new property and continue to grow tax free until you sell the new property. Capital gains is most likely taxed at 15 percent depending on which tax bracket. You could probably do some research online to calculate your taxable gain. You need to calculate your cost basis.

I see multiple benefits now too- you don't have to deal with any appraisal issues either!

Your point clearly rings true when you are comparing a 500k outlay to buy 10 homes compared with 50k outlays, refinance, and rinse repeat 10 times. I guess my point was along a different line entirely. Why pay cash and then refinance to repeat the process over and over again when you could have financed from the start--if you notice in my scenario and yours we both end up with the same assets and same cash outlays.

I still dont get it. But, I am curious nonetheless.

What if you just financed 10 properties to 90 percent LTV all in Year 1. So, 5k down on 10 properties for a total of 50k in expenditures. Total cost is 50k, and time to aquire is zero. In your example above, you indicate that the total cost is $0 for a 30 month plan, but this assumed you are able refinance to 100 percent LTV in each transaction? Not sure I am aware of any lenders doing this at the moment.

my scenario: total cost to aquire 10 homes; 50k; time to aquire- zero months

your scenario (assuming you can only refinance to 90 percent LTV each time): total cost to aquire 10 homes; 50k (5k equity trapped in each of 10 homes) + transaction costs X 10; time to aquire- 30 months

????

Sounds like a really great offer nonetheless. I think you cant go wrong! But, this is a major decision and I can see how some technical analysis or insight would provide some comfort in your decision.

Sherry-Some of the appraisals that came in low and emphasized in the comments the excessive profits ended up killing deals (me as the buyer). It's hard to say if they used this rationale to select comps and produce an unfavorable report, or if they started with a crappy selection of comps (inept appraiser? not sure) and then realized they needed to justify it somehow and added comment to support their claims. Which came first…hard to say.

I have never reached an impasse in negotiations b/c of a claim in seeking excessive profits but it has been just another thing in the long list of claims buyers/realtors make to justify a low offer. I wouldn’t distinguish this from anything else like inspection items used as a tactic to renegotiate. If you have the comps, you always have a strong rebuttal which can’t be refuted.
On the square footage issues- I had a similar issue recently with a foreclosure I bought. The MLS listing was not correct—they used a public record search but it was from a previous sale (the Sherriff sale which was not correct). The assessor's office and appraisal confirmed an additional 200 square feet (a different problem to have). I started to think about the impact on comparable analysis and how the inaccurate data might artificially increase values in my neighborhood as the price/ square foot was $20 more. The MLS is the place to start; I talked to my realtor numerous times about reporting and just gave up hassling her. She did indicate there is a way to correct data when you were not the reporting party (Michigan MLS).

When trying to predict long-term rate movements I was thinking more about your exit strategy in five years and what conditions would be like then versus your offered adjustable rate. I agree it would be difficult to do a sensitivty analysis comparing the CoM expected rates (and returns with your 300k) with your current 30 year fixed.

Am I missing something here? What's the benefit of paying with cash and then refinancing? Assuming there are no seasoning requirements on a refi, what are the net benefits? Why would you pay transactions costs on a refi to have your money go out one door and come in another door? I don’t get it...

Joe- I see your rationale in Point 2, but how is this any different than keeping your money at the onset with financing and retaining your proof of funds (less a down payment)?

Also, to anyone advocating for owning a property free and clear I would challenge you to think about this concept in terms of the benefits of leverage on overall returns. Assume for example you own a 100,000 home with a mortgage to 90 percent LTV. Project cash flows on a highly levered property for the next 30 years and discount them back to the present day (Year 0) using a risk-free discount rate. Assume the home appreciates at the rate of inflation or 2-3 percent and calculate your exit price in 30 years—discount this back to year 0. Use your remaining capital to purchase 9 other similar properties to 90 percent LTV (expending a total of 100,000) and perform the same analysis.

By comparison, take your unlevered property with no mortgage and do the same exercise. The cash flows will be decidedly greater but the overall net present value of the cash flows for scenario 1 will always markedly beat scenario 2. Plus, the return on equity in both scenarios will be decidedly in favor of scenario 1.

The concept illustrated here is really not that complicated. What do the capital structures of Fortune 500 companies that earn billions of dollars in profit annually look like? They are a mix of debt and equity, but mostly favor debt with a lower cost of capital.

The other key point is real-estate values will rise and fall over the years regardless of the amount of leverage you hold on these assets. When the home illustrated here is worth 110,000 dollars in a few years would you rather have earned a 10 percent return ((110-100)/100) on your unlevered property or a 100 percent return ((110-100)/10)?

Your options may be limited without a co-signer. A parent could be a co-applicant with you as a non-occupant co-borrower. FHA programs like these are sometimes referred to as kiddie condos.

Semantics really- the strategy outlined by Albert achieves the same result of maximum leverage. It's just a timing difference.