All Forum Posts by: Matt Moldenhauer

@Brandon Clark if the comps on your street are going for what you say they are, you should be able to refinance your house with a conventional loan. Appraisal comes in at $130,000 and you owe $104,000, there's your 80% LTV and you can drop PMI. You might need to add some money to cover your closing costs. UNLESS your home appraises for $135,000 and then that would leave you with an extra $4,000 to help cover your closing and prepaids. I'm currently in the middle of doing this so that's why i'm familiar with it. This would allow you to get another FHA loan.

Don't forget about your six months reserves though. You need to have six months of cash on hand to cover your mortgage for your investment property. Money in a retirement account can be considered too:)

@Brandon Clark  Is it possible to get an conventional loan (5% down payment) on investment properties?

From the discussions I've had with my lender, no. Even if you were able to do 5% down, you're cash flow wouldn't be there. You would probably need some "super secret" inside track where someone was willing to sell you a great piece of property that cash flowed for half price. Then maybe a lender would consider it. Maybe?

You might try refinancing your current home while it's still your primary for better cash flow. If it will appraise at a 80% LTV you could drop PMI, increasing your cash flow. Turn that house into a rental(if rents go that high in your area) and buy another primary at 3 or 5% down. Repeat. Your cash flow won't be the best, but your COCR will be great.

I could see it maybe being a decent idea because of the tax advantages. Wouldn't having a payment kill your cash flow though? It may not leave you with negative cash flow, but would surely put you in the red as soon as you started having to make repairs or it sat empty. 

I have not. Springfield has a population of about 170,000 people with a metro of about 440,000. Unless she's a river rat or frequents the same hangouts as we do, I doubt I would ever run into her. lol

@Casey Millspaugh Welcome!

Hi @Richard Mahn. This is what we just did:

Primary residence that will turn into a rental in a year. Purchased 5 years ago for $100,000 @ 4.5%FHA loan. Refinanced it for 30 years @ 3.75% (since it's still our primary we got a better rate) and it appraised for $118,000, giving us our 80% LTV needed to drop PMI. We are saving $148/month by doing that, which will increase our cash flow next year when we turn it into a rental. Is this going to be the best cash flowing property? No, but i believe it's still a good investment because when I purchased it I put about $1,500 cash down on it. Refinance closing costs were rolled into the new loan and PMI I was dropped. The COCR is pretty good if you ask me.

If you're going to try and refinance to improve cash flow, do it now while it's still your primary or you will pay more and need a 75% LTV.

I'm by no means an expert, but the first thing I look at is a COCR of at least 20% and cash flow of at least $250/month. If those numbers work, then we look at the house a little closer for consideration. I wouldn't buy a house that immediately needed big ticket repairs unless it was purchased at a discounted price to do them. I may be wrong, but from what little bit I've read, cap rate pertains more to commercial property? We look to buy and hold for the long run. During that 30 year period, everything is going to need major repairs. We set aside $3,000/month to invest in buying more property(which in our market comes out to about two houses a year). If something major comes up, it comes out of that fund. We keep the monthly cash flow.

@Kraig A. We were in the same boat as you. Here is what we did:

Primary residence that will turn into a rental in a year. Purchased 5 years ago for $100,000 @ 4.5% FHA loan. Refinanced it for 30 years @ 3.75% (since it's still our primary we got a better rate) and it appraised for $118,000, giving us our 80% LTV needed to drop PMI. We are saving $148/month by doing that, which will increase our cash flow next year when we turn it into a rental. Is this going to be the best cash flowing property? No, but i believe it's still a good investment because when I purchased it I put about $1,500 cash down on it. Refinance closing costs were rolled into the new loan and PMI I was dropped. The COCR is pretty good if you ask me.

If it were me, I would buy more property. Seeing the Cash on Cash Return formula is what sold me on investment property. If you're not familiar with it, it goes something like this:

COCR = Annual Cash Flow / Total Dollar Investment

Say you have $80,000 cash sitting in your bank account. You have narrowed it down to two options:

A) Payoff your house because that's conveniently what you owe on it. So now you have no money coming in and no money going out and in 30 years you'll have that one house that may or may not be worth the same, but probably pretty close. No tax deductions either.

B) You take that same $80,000 and you buy five $80,000 investment properties putting 20% down on each($16,0000 x 5 = $80,000). Say they each give you a 20% COCR. That would be cash flow of around $3,000 per year. You have five of those, so over 30 years they will pay you around $450,000 in cash flow. Also, at the end of that 30 years you will have $400,000 in property, instead of your one $80,000 house you decided to pay off, saving you maybe around $225,000 over 30 years? That $80,000 has paid you $15,000 per year and given you $400,0000 in property. Now don't get me wrong there are A LOT of other expenses and things to factor, but just looking at it from an income point of view, it looks pretty good.

@Brandon Hall Thank you, that was exactly the kind of answer I was looking for. You were the the "experienced CPA" I was referencing in my post. It seems like no matter what search I do I end up running across a post of yours. Good stuff. 

I hope I didn't offend any tax professionals either with my comments. I realize there is MUCH more to the job then what goes on at tax time. That's why I was trying to get a better understanding of the process. You guys eat, breathe, and sleep this stuff. I know enough about tax code to know it's better left up to the professionals. That's why I was really confused at how I could be trusted with classifying every expense correctly. 

Tax planning and strategy is what I'm really interested in. I read somewhere in the past, maybe even one of Brandon's comments about getting creative. Waiting to make a larger repairs at the end of the year and possibly trying to break the job up to see a more of an immediate tax savings.  

Is there something I can read that maybe elaborates a little more on the IRS Schedule E expenses?

Thank you EVERYONE for all of the answers. 

Excuse my ignorance here, but isn't that what I pay you for? To go through things and see if everything is being sorted correctly, if things are being categorized as repairs or improvements, etc? I'm not trying to be a smartass, but from what I've seen that's one of the toughest parts. Figuring out if fixing X amount of roof qualifies as a repair or what. I see seasoned investors and CPA's give advice, only to be set straight by another more experienced CPA on these threads. If a CPA is incorrect, how am I to be expected to categorize things the right way? You would basically just be plugging into the computer what ever I give you, making me liable for my own ignorant mistakes. If I'm wrong here or misunderstanding things, please by all means set me straight. Maybe I need to do more research and dig into the tax code more.