All Forum Posts by: Timothy W Hanson

Hello Bigger Pockets!

I will be closing on my first investment property next week, it is a 4-plex that will cash flow about $700 per month after all expenses including tax escrow, (etc. even including mowing services). I understand that on paper, when working with a CPA, I will have depreciation (etc.) make it so I'm actually operating at a near loss which correctly will reduce my taxes on that cash flow. 

Here is my question, I currently work a salaried job and make <$100k per year.  Will this job now bring in more money / tax return at the end of the year if a CPA sets up my taxes correctly?

Sorry to sound so fresh to this. Hope someone can provide some insight! Thank you all. 

So I did some more research on this topic. 

It really does make sense to purchase down the interest rate to a 3.0%. I've also done some more research on the "PMI" on FHA loans. As of right now, 3.5% down payment FHA loans are setup so the PMI does not expire/disappear when you build 21% equity. The PMI is for the life of the FHA loan, and the only way to remove it is to re-finance out of the FHA loam into a conventional loan (which likely would not be at such a low rate, 3.0%). The only exception is if you place a down payment of 10.1% instead of the minimum requirement of 3.5%, if you place 10.1% down the PMI expires on FHA loans after 11 years. This would be a strategy to lock in the 3.0% interest. So the decision to go with the 10.1% payment and the 3.% payment is ultimately a gamble on the conventional interest rates in the future and assessment on whether the extra 6.6% in downpayment is more useful elsewhere. 

Myself and another investor went on youtube and searched through Zillow for real estate near Denver Colorado. This is not so much educational but searching through Zillow with a friend is much more fun! Maybe less productive.  https://youtu.be/xvRR5BEriUQ

While searching through the properties, I realized the price ranges in Denver really seem to favor FLIPPING homes. Not purchasing and leasing out. Is this what most investors near Denver have found?

I really need help here to anyone that can provide insight! Here is what I was sent:  

It is very confusing to me! 

- - - - - Email from my Realtor - - - - - 

"Hi Tim,

This lays out what it looks like to use that $7k credit to prepay the FHA Funding fee vs. use that money to buy down the rate, which might make more sense over the life of the loan. Amber and I are working toward a spreadsheet to show where the principal paydown and appreciation intersect at 79% LTV so you have an idea when you can obtain a new appraisal and get rid of the private mortgage insurance. Andy made it sound like there would be no PMI initially but, he meant only no FHA funding fee so, that caused me to dig deeper. You can pay points to buy the rate down and also use the $7k credit more wisely, after talking through this with Ryan, whom I've copied on this email. Please feel free to contact him anytime to understand this further.

We'll report back with where we think the sweet spot is in all of these options to maximize this deal for you.


Thank you,

Bryan"

- - - - - - - - - Forwarded Email - - - - - - - - - 

"Hello Bryan,

Thanks for reaching out, here is a breakdown of the ways we can do this for Tim. There are several scenarios and ways to go about this but I will detail them as we go. The bullet points are items that are pretty much locked in moving forward. The rest is as follows:


* Purchase price - $437,000
* Loan Amount - $421,705
* Loan Amount with Financed FHA Upfront Premium ($7,379) - $429,084
* Down Payment - $15,295


Loan Amount
Interest Rate
Principle & Interest
Private Mortgage Insurance (PMI)
Monthly Escrows - Taxes & Insurance
Total Payment (PITI)
Closing Costs & Pre-paid Expenses - Estimated
Seller Credit for Upfront PMI / Closing Costs & Pre-paid Expenses
Cash to Close - Estimated

1. $421,705 (NO FINANCED UPFRONT FUNDING FEE)
3.625%
$1,923
$299
$575
$2,797
$13,104
$7,000
$21,399

1. $429,084
3.625%
$1,957
$304
$575
$2,836
$5,725
$7,000
$15,295

1. $429,084
3.5%
$1,927
$304
$575
$2,806
$6,660
$7,000
$15,295

1. $429,084
3.25%
$1,867
$304
$575
$2,746
$8,849
$7,000
$17,144

1. $429,084
3.0 %
$1,809
$304
$575
$2,688
$12,792
$7,000
$21,087

So the major differences here is between option 1 and the rest of the options. FHA charges an upfront Mortgage Insurance Premium (MIP) of 1.75% of the loan amount but they allow this to be financed. As the offer is written, you would get this almost paid for in full by the sellers credit of $7,000. However, in options 2 through 5, when you finance that premium, you see the true difference in payment and Cash to Close. It's substantial because the upfront premium is so expensive. So if you were to amend the offer and have that credit go toward EITHER the FHA Mortgage Insurance Premium OR general closing costs and prepaid expenses, then we could finance the FHA MIP and use that $7,000 for closing costs and prepaid expenses. Then we could also look at buying the interest rate down to make your payment lower as well. Please note on options 2 & 3 that the cash to close doesn't change because the seller credit is more than the closing costs and prepaid expenses so you would have to bring your manditory 3.5% down payment. The remaining balance would be used as a principle reduction.

I know this is a TON of information to go over but it is important to know your options and what would be the best way to proceed with the loan. I am always available to go over this or any other information you would like to discuss. This is a good way to get a 4 unit property and FHA allows for only 3.5% down so that is great as well.

Should you have any questions, please reach out."