All Forum Posts by: Steve Elling

David,

When taxes are mailed in November, you will almost certainly be subject to paying taxes on the full assessed value of the home. You are no longer eligible for a Homestead Exemption. Call your county tax assessor for exact details and numbers. Ask for a supervisor. Be sure you know the risks. 

For instance, I'd check to see if the tax valuation resets to current market value. Because if you have been living there for a while, your annual tax valuation increases have likely been capped at a low percentage (say 3-4%, max). As such, your property is being taxed at perhaps one-third of its actual "street" value these days.

Dropping your homeowner exemption could be pretty disastrous if they reset the value at current levels, because I'm guessing that they will not allow you to revert to your current taxation level next year, if this rental is a one-and-done proposition. 

Tread carefully and talk to the assessor first. Also, understand that rental income is taxable. 

On the plus side, renting for six months and a day means you will not be subject to state/county/city hotel taxes, which is smart. 

I'd slightly overpay if I was running against the IRS clock on a 1031 exchange and needed to buy something to avoid the 15-20% tax hit on capital gains. Otherwise, I need some extra equity in the deal. The market is so bloated right now, with interest rates already pushing 5% on rental property purchases, I can very reasonably see values soon leveling off or starting to drop as appetite dwindles. So overpaying makes even less sense in most locales. 

I have a HELOC with Bank of America and they have zero control over how I use it. Moreover, I don't remember them asking how I planned to use it, either. Example: I bought a rental property with cash using HELOC funds, then quickly paid it back down to zero balance. I regard it as self-financing on smaller-sized real-estate deals. It also speeds up the purchase process -- I had the money in hand and closing took place in days, not weeks or months. And of course, a cash offer makes a huge difference to some sellers.

As for using HELOC funds for home improvement specifically on the residence the line of credit is drawn upon, it's supposedly tax-deductible.

HELOCs are fantastic, and the temptation to use them for other investments is very real. For instance, since the repayment interest rate on my account is currently 4.25%, if I elected to park $40K in an investment vehicle like BlockFi, which pays an 8.25% interest rate for storing certain types of cryptocurrency on its platform, you'd actually come out ahead and MAKE money. I haven't had the gumption to try it, though.  

If the bank asks how you plan to use the HELOC funds, you can always give them a list of several options: Student loan repayment, credit-card paydown, car-loan payoff, home improvement, or investing. That's being honest. You MIGHT use it for all or none of those. But if you tell them you are using the cash as a down payment to secure yet another property with a mortgage, they might nix the deal. Because with the HELOC in place, they are the lienholder on your house (and possibly the second lienholder if you still have a primary mortgage in place).

You might also find that the lender writing the mortgage on the new property won't process the loan if they know you are using borrowed funds as the source of your down payment. You'd be using borrowed HELOC money as the down payment to borrow MORE money on a second property, and they want you to have skin in the game, as well as something stashed away in cash reserves.

HELOCs are like a credit card -- at a fraction of the 18% the cards are charging. 

If your HELOC cap is high enough, you could buy a rental unit (not in Laguna, though) with cash and the bank wouldn't know the difference, or probably even care. Like Rodney Menendez said above, it's your equity money.

I bought two townhomes with cash this summer and two more units in the same development have popped up on the MLS in the last few days. Are there any loan packages available to pull equity from a rental unit that has no mortgage whatsoever? Can I get any cash out of one paid-off unit to use as down payments on the other two? Speak to me, BRRRR people! 👍

I invested $10K about 304 years ago, and have reinvested some of the payments back into the loan over the ensuing years. While the percentage rate has been far better than CD rates, there are tons of red flags.

For instance, I have invested solely in A, B and C-level loans. Supposedly the safest. Of the 481 notes (all at $25) in which I have invested, a stunning 71 have been charged off or are at least 31 days late in payment. Before signing up, I was led to believe their default rate was in single digits. And I only picked the top three categories for risk in A,B and C! 

Worse, the company assigns the classification and interest rate to the borrowers. In other words, we investors don't pick the customers.  When it's wrong, the company charges a "recovery fee" to try to collect delinquent funds.

That's right -- they serve up these customers for loans following whatever minimalist vetting and diligence they require, then charge the investors a fee to go after our funds. They win both ways.

I made money doing it, but I hate that people are walking away owing me money. And there's nothing I can do about it. 

Dave, I can see why you are the 1031 sensei around here.

That re-fi option following the exchange is brilliant. 

I think you've rightly figured out my plan here -- the whole idea is loan consolidation. Three of my four SFH rentals have smallish mortgages, and the fourth is paid off. Sell the latter and pay off the former, then we'd have only the single re-fi loan on the "new" house to pay.

Thanks, Mike.

Did not know that, either. 

Are there real estate attorneys who specialize in these transactions?

Thanks, Clayton. That's a lot to digest. 

Here's one for the seasoned investors and tax experts out there. Trying to verify something:

I have a rental property that is fully paid off that we are considering selling. Based on what I've gleaned online, it appears that we CANNOT use the proceeds (it's worth about $100K above our original purchase price) in a 1031 Exchange to pay off the mortgages on a couple of our other, existing rental homes. If we went that route, we'd have to pay capital gains.

So, as I understand it, in order to escape paying 15% in capital-gains taxes on the profit, the proceeds from the sale can only be used to purchase another property of equal or greater value, and only within six months, per 1031 Exchange rules. 

Does that sound accurate, or am I whiffing somehow? 

Fellow Landlordians,

Looking for some advice, insight and expertise from you folks who have been dancing in the investment-home mosh pit far longer than I have.

I own four rental properties in Central Florida, all single-family homes of around 1,300 square feet. Of the four units, only the home that is worth the most in estimated value is fully paid off. 

The other three have mortgages which run a combined $1,550 per month (not including escrowed taxes and such). Making the payments is not an issue. We easily cover the mortgage costs with the rent totals and turn a nice cash flow on all four units.

But here's the question.

The home that is paid off clears about $1,200 per month after the taxes, property manager, insurance and assorted costs are tallied. Great profit to be sure. However, while the cash flow is great and there is no mortgage payment, the house exacts, by far, the highest monthly toll in out-of-pocket costs because it's located about 275 yards from the Atlantic Ocean, so the insurance and annual tax assessment is ... up there.

Anyway, the raw comparative math suggests that it would make more sense to sell the beach house and use the proceeds to pay off the outstanding mortgages (in full) on the other three rental homes. Some of you folks dislike carrying mortgages. Some view mortgages as a form of "good debt." I'm on the fence. 

Not sure what the capital gains ramifications would be, since the beach house has appreciated by about 75% since I bought it in 2006. And I'd have to find other IRS write-offs to cover the annual rental profits.

Some complicating variables to note: Since it's a beach house, the value has spiked far faster than the estimated worth of the other homes, a reality that surely will continue, since the coastline is shrinking, not growing. So from an investment standpoint alone, it's the most valuable of the four properties as far as value projections, too.

Seems like, with mortgage rates set to increase by another half-point in 2019 and mortgage applications already down nationally, now might be the best time to sell. 

What would you do?

Thoughts?

Thanks,

Steve E.