Filed under: Advice Needed
Question: I’m thinking about investing in a home for purposes a generating a modest positive cash flow through renting. I will sell some stocks to generate any required cash. Will the initial tax benifits of the investment offset the liabilites from the sale of the stocks?
An example would be helpful.
Answer: simply do an amortization on your proposed purchase, then calculate the tax savings of deducting that interest amount from your gross income. this assumes that you are itemizing your taxes. If you are buying the property for investment purposes, mot a residence, then you can also deduct the “purchase costs” and maintenance costs, as well as annual depreciation of a the purchase price over 27.5 years. (this amount will eventually be taxed when you sell, but it’s always better to pay taxes later). Consult a competent tax accountant. He meant to say “cost recovery.” It’s an income tax issue. We use to call it “depreciation,” but the tax laws were changed and the new term is “cost recovery.”
The idea is that the building becomes worthless at the end of its economic life. That is, eventually the building will be so out of date that it must be torn down. Therefore the investor must allocate a portion of the income to replacement of the structure many years from now. The income tax laws allow the investor to claim this amount annually as an expense, even though it doesn’t have to be paid annually.
Many years ago the investor had to estimate the remaining economic life of the structure. Naturally, the shorter the life the greater the annual amount of cost recovery. Since the cost recovery amount usually put the investment into the red (on the books), there would be a loss to report on the investor’s tax return. The shorter the economic life, the greater the paper loss. This loss could be used to offset income from other sources. This is why a real estate investment is usually referred to as a tax shelter.
Back when Reagan was president he got Congress to change the tax laws to provide for a flat 27 1/2 years economic life for residential investment property and 39 years for other kinds of property. The reason for this was because the investor and the IRS used to argue constantly about the real remaining economic life. The investor would claim it was shorter in order to increase the annual paper loss, and the IRS would claim it was longer. Now we just use an arbitrary number and there is no arguing.
You cannot claim cost recovery expense on a personal residence, on vacant land, or on the portion of an investment in an improved property that is allocated to the land under the building. It can be claimed only on structures, and only on those that are held for the production of income, on speculation, or for trade or business purposes.
Note that cost recovery is an income tax fiction that has nothing to do with the real market value of the property.
I should also add that there is a related issue that should be mentioned — capital gains. When you sell the property you must pay tax on the profit. The profit is based on the remaining economic life (unrecovered basis) at the time of the sale, not the original purchase price. So every year when the investor claims the cost recovery it is increasing the pain when the property is sold down the road. Of course, there are ways to alleviate that pain to some degree, but that is beyond the scope of this post.
January 1, 1970
Question: We need to find financing for an unusual situation. In order to avoid a partition sale, we want to buy out a 1/3 owner, using both the 1/3 being bought and the 1/3 we have as collateral, but still leaving us with only a 2/3 ownership. The property is commercial, in New Jersey, and is currently rented. The purchase price is approximately 20% less than 1/3 the appraised price, so it’s a good deal for us – almost certainly better than the results of a forced partition sale. The propery is an inheritance, and neither of us actually live in NJ.
My initial contact with Fleet indicated that they don’t do investment mortgages. So now I’m wondering where to go – how to find a reputable mortgage broker to deal with this?
Answer: Look at this from the bank’s perspective. They want colateral that can easily be turned into cash if you default on the loan and the ability to make the monthly payments.
I realize you are being intentionally vague, but you don’t present any facts that the business could be readily sold for cash. Worse, they don’t even have clear title as the other 1/3 of the business belongs to someone else. Foreclosing on the business could be a real mess if the other owner overvalues his/her 1/3 and threatens to sue if not properly compensated.
You haven’t mentioned any great cash flow that will easily repay the loan. Many businesses are just scraping by. Heck, the bank would give me money to buy General Motors tomorrow if I could convince them that I could make the loan payments. That is all they care about.
Can you get the 3rd owner to co-sign the loan? Bribery usually helps. Or threaten a scorched earth (partition sale) strategy if he won’t. In any event get a credible story together before contacting a lender. The fact that you have a money problem doesn’t mean anything to them. I am an indiviudal investor interested in your situation. Let me know the specifics such as property value, existing liens, amount of money needed and term and direct contact info so we can discuss.
January 1, 1970
Question: I purchased a rental property as primary residence at the advice of the lender for the lower int rates, apparently quite common.
I lived in it for 2 months, then rented it out for 6 months (hated being a landlord). It has been on the market for 1yr, no takers and vacant.
Its priced below what it was appraised at by ~15000. It is nice (no damage) but is a basement unit. I think when appraised lender just did a search/drive by and found most condos in area going for X at that size in that area and called it that. Again, nice but for what I paid no one wants to live in a basement unit.
I can no longer afford it, I obviously live in my “other” home. I want it GONE. It has a first and second mortgage (both up to date). I can afford to pay off the second equity line (~17000) and that wipes out all my cash (if I sold it today that is how much I would have to bring to table). Every month that amount dwindles.
Advice needed:
Pay off the equity loan and let bank foreclose? Just let them Foreclose? Deed in Lieu? etc.
They won’t talk to me about a problem Iam having until I am behind in payments. My credit score will be trashed I know, it is 800 right now (it goes against every fiber of my being to go behind on payments) but this is killing me.
Answer: I know you didn’t like “being a landlord” — but realistically, that’s your best option. Get the thing rented, ASAP, so it’s not eating a hole in your pocket. Then you’ve got some breathing room to try to sell without taking a bath. You get take time to sell, you’ll likely get a better deal on sale if you aren’t so desperate, and you’ll save your current (really good) credit rating.
Is landlording so bad that you can’t do it for another year, and you’d rather trash your credit score and start talking to lawyers? Get over it. It ain’t that bad. Before you let it go back to the bank, you can sell it subject to the existing loan, which means you give title to the buyer who takes over payments. He’ll set up a trust so that the whole thing in nearly invisible to the lender to avoid triggering the “due on sale” clause. He’ll then try to lease option it to another.
That is a terrible way to sell a house, but it beats letting it go back. That will ruin your credit. Selling it subject to might run your credit if the guy you sell to doesn’t honor his obligation. If you choose this, just call one of the numbers you see on the “I buy houses” signs everywhere in your area.
You could lease option the house to a buyer yourself, but you’d have to learn how to do that….not so hard, really.
Your best bet is to learn how to find good tenants. There are tricks to doing that, credit and criminal history checks, important rules that protect you. If you hate being a landlord it is probably because you got some bad renters. A bad renter can destroy you r home in a short while……….and never pay rent.
A good renter will pay off your mortgage and never give you any trouble. You could probably have $100 or $200 dollars a month positive cash flow and in thirty years you’d have a house worth a couple of hundred thousand (who knows in thirty years).
Pay a few bucks for a property management course and give it another chance. Rent smart….not quick!
January 1, 1970
Question: In relationship to my other recent note (thread titled “Investment mortgage advice needed, NJ”), I’m now looking at alternatives. One, in particular, is to take out a margin loan against my existing securities. I can currently withdraw about $150K, of which about $40K is cash the rest margin loan. I figure that if I put the full net income ($800/month after taxes) back into this at current margin rates (4.75%), then I’ll be paying down the margin loan at about 100-200/month. Once the lease on the property gets renewed (2006), I’ll be able to double those payments.
Does this seem like a reasonable alternative – keeping in mind that there’s the risk of the property going unrented (small, but possible), and obviously there’s the risk of a market crash causing a margin call (again, small but possible)
Answer: Much better alternative – you will find difficulty in obtaining conventional financing for only 2/3rds of a business/building.
If you were my client, that is what I would suggest you do. Don’t go to the full 50% on your margin, and that risk will be smaller. And, as you pay off some of the balance it will also go down. You may want to couple the portfolio with some covered calls, to generate some income in the portfolio to also drop the margin amount. Then, even if the market goes down you keep the income and should not hit the 70% level that will cause the margin call to kick into place.
Remember one other thing. The margin account is a variable. don’t assume it is 4.5% (By the way. I see most margin rates even for preferred customers at higher than that right now. Are you sur it is 4.5%? Just chekcing.) If rates go up (and they probably will from here, since we have probably hit bottom and will start rising whent he economy picks up) then the rate will go up too. SO, keep that in mid too as you do this deal.
January 1, 1970
Question: I am interested in buying a multiplex. It has 6 units and I have visited it already and is in decent shape. I am in Canada, so not sure if same as in USA, but banks will lend you only 75% on multiplexes if you do not occupy one of the units. I have the 25% to give, but I really wanted to buy 2-3 different buildings and splitting it as cash down on three rather than on one. Obviously I have not found the other two yet and prefer to take it one step at a time.
Is there anyway for me to get the bank to finance with 5-10% down? I am dealing directly with the seller with no agent, so not sure if I could be creative and benefit from that.
Any advice is greatly appreciated
Answer: Anything beyond 75% and you are dealing with the rules of the mortgage insurance company.
Is there any way that the seller would take back a second mortgage? Use the bank for 75% and finance another 20% with the vendor? rental property is not taxed as capital. you don’t get to pay the capital gains tax on price increases like you do with stocks and bonds. it’s a “depreciating asset” and has it’s own tax rules. I’d suggest looking at the taxation carefully and understanding it before buying. Actually when you dispose of the rental property, you pay capital gains tax on the difference between the sale price and the depreciated capital cost. So, for example, you bought a property for $100k, depreciated it down to $0 on the books, and then sold the property for $500k, you would include $500k on your tax return as a capital gain since the CCA allowance reduced the adjusted cost base of the home to $0 and the tax owing is the difference between your ACB and the actual selling price.
If you die, or if you ‘give’ the property to someone, CRA will still ‘deem’ a value for disposition, which usually would be a value consistent with other similar properties in the neighbourhood.
January 1, 1970
Question: I have a couple of questions, and thought that this is a good place to look for answers. Sorry if this is long… In 1998 my wife and I bought our first house. Our credit was “less then stellar” and we didn’t have 10% down. So we did a deal with a mortgage broker where we got 100% financing. One mortgage was for 80% of the loan, the other was for 20%. the purchase price of our house was $130,000. We bought the house in March of 1998, and then in October of 1998 we went to The Money Store to get a home improvement loan. That loan was only for $13,000. The reason we did this, is because the house was in dire need of a roof (we knew that when we bought the house) as well as some cosmetic work (paint carpet, floors, landscaping, etc.). Now, this seemed like a good deal. We figured that within a couple of years we would just re-finance them into one. Skip to August of 1999. Our first attempt at Re-financing the house. The lender tells us, that, “because the home improvement loan is less then a year old, we can’t re-finance it yet.” So we wait…. In January of 2000, we went to a “credit counseling” service to get our credit cards paid off. Shortly thereafter, we go to get our mortgages refinanced into one. But this time we are told that we can’t, because we are in “credit counseling” which the bank see’s as bankruptcy. We hell, if we can’t re-finance, then we might as well file bankruptcy. The credit card companies who were so willing to take our interest payments, were not so willing to work out a deal to get their money back. So we filed Chapter 7. Now, we kept the house(3 mortgages), and both cars. But now we didn’t have any credit debt. Bankruptcy was final in late august 2000. Skip to August 2001. We were told, that we could refinance the house a year after the bankruptcy. So almost a year to the day, we go through the motions. Total of the three mortgages is $140,000 and some change. We have the house appraised…appraisal comes in at $156,000. Bank says, that because the chapter 7 is only a year old, they can only refinance 85% of the value of the house. So, now we still have 3 mortgages, and one of them bumped up their interest rate right after we filed bankruptcy. Almost as if to say… “we got you by the yam-bag now buddy!” So now with taxes and insurance, our house payment is almost $1800 a month. This is almost half of my take home in a month, and I need to get it lowered. So now my wife and I are seriously thinking of either selling this house, or just letting it foreclose. I don’t really know much about foreclosure, but I would rather not let it get to that. Selling it could take up to a year, and I don’t want to wait that long. I make 60K+ a year, and have been in the same trade for close to 16 years, with 7 of those years at the same job. Where can I go for help. Can I refinance now? What happens if I foreclose and what are the legal ramifications? Any help and advice is greatly appreciated.
Answer: Well in 20/20 hindsight I can see that you made a few mistakes. First: If you knew that the house needed a new roof then you could have negotiated with the seller to have it fixed when you bought the house. Best way to do that would be to negotiate a repair allowence as part of the selling price. This would give you money after closing to fix the roof that would come out of the first and second mortgages.
Second: Getting that Home improvement loan so soon was a mistake.
3rd: Getting credit counseling. You should try out your negotiating skills on your own and talk directly with your creditors.
4th: Fileing for bankruptcy made the situation even worst.
Foreclosure will make things even worst. Your best move at this point is to try to live with it. It won’t be easy. After a while your credit score will get better and you will be in a better position to refinance.
Beware of forclosure. If the bank doesn’t get all the money it’s owed, they can file a motion to collect the remainder. It’s called a deficentcy judgment. For the legal advice, you really need to talk to a lawyer. The one who handled your bankruptcy ought to give you a consulatation for a reasonable fee. You need to discuss deficiency judgments and the possibility that you won’t be able to protect other assets or your income through bankruptcy if the lender seeks one. If the lenders foreclose and take a loss and they can get a deficiency judgment (your lawyer can tell you if they can), you still get stuck with the bill for the difference between sale price and the amount you owed plus expenses. The mortgage companies will try to get the best price they can, but the fact that the listing will have ‘as is’ in it (all foreclosed property listings are sold ‘as is’) will lower the price it brings. You would be much better off to be in control of the process. Additionally, you will be able to protect your credit as it rebuilds.
If there is any way to do it, the best bet is to keep your payments up and keep the property up for another year or two. Frankly, and as someone who has had credit issues I’m not being judgmental here, anyone who tells you that there is an overnight cure to bad judgment in the past with regard to credit is trying to sell you something. Whether it’s a mortgage broker with a great deal on a refinance, a lawyer touting bankruptcy or a ‘nonprofit’ credit counselor who tells you (wrongly) that he’s protecting your credit rating. (BTW, CCCS is actually worse for your credit than bankruptcy when applying for a mortgage – probably at least partly due to the fact that you can only do a bankruptcy again after a certain time passes.)
If you can’t keep up the payments, you need to find a real estate agent who specializes in ‘loss mitigation consulting’. You’re lender may be able to recommend someone. You may end up owing after the sale is complete, but you have the opportunity to negotiate up front and maintain some control over the process. A ’short sale’ or other negotiated settlement will also be less damaging than a foreclosure to your rebuilding credit (though it will still be a negative credit item.)
January 1, 1970
Question: I am interested in buying a multiplex. It has 6 units and I have visited it already and is in decent shape. I am in Canada, so not sure if same as in USA, but banks will lend you only 75% on multiplexes if you do not occupy one of the units. I have the 25% to give, but I really wanted to buy 2-3 different buildings and splitting it as cash down on three rather than on one. Obviously I have not found the other two yet and prefer to take it one step at a time.
Is there anyway for me to get the bank to finance with 5-10% down? I am dealing directly with the seller with no agent, so not sure if I could be creative and benefit from that.
Any advice is greatly appreciated
Answer: Banks won’t extend that much credit, and for good reason. They don’t want to be dealing with the risk of having inexperienced and undercapitalized operators overleveraging themselves in the real estate market when there is a good potential that a year of recession could easily place a 5-10% loan underwater.
With a 5-10% down payment loan, you are most certain to pay a higher interest rate as well. If you are looking for diversification of real estate assets, why don’t you buy into a partnership or real estate investment trust instead of trying to do it all yourself, concentrating all of your risk in the same local economy? Maybe, maybe not. But would the seller consider helping you out by taking back a 2nd mortgage of 15 to 20%?? Typicly you would write this as a 30 year loan with a clause that requires you to pay the full ammount due in 5 to 10 years. Actually when you dispose of the rental property, you pay capital gains tax on the difference between the sale price and the depreciated capital cost. So, for example, you bought a property for $100k, depreciated it down to $0 on the books, and then sold the property for $500k, you would include $500k on your tax return as a capital gain since the CCA allowance reduced the adjusted cost base of the home to $0 and the tax owing is the difference between your ACB and the actual selling price.
If you die, or if you ‘give’ the property to someone, CRA will still ‘deem’ a value for disposition, which usually would be a value consistent with other similar properties in the neighbourhood.
January 1, 1970
Question: Can he really sue us for this? There was nothing mentioned about this in offer letter that was signed by him and the owner. If he does bring a suit (and has no case to win) will there be a hold on the lot until the court gives its decision?
Answer: This is a legal question. I am not a lawyer.
If a real estate broker advertises a property, he is not promising to sell a property at that price, he is suggesting that under the right terms, the seller will sell the house for the listed price. The seller is under no obligation to sell; he is not making a binding offer by advertising the property. The offer may be withdrawn for any reason (except for fair housing discrimination) at any time.
The courts probably won’t enforce what is not in writing in this contract, but there’s no reason that an angry buyer can’t unjustly sue you. If his lawyer is smart, he can slap a LIS PEDENS (lawsuit pending) notice on the property, and this will make it impossible to sell the house until the lawsuit is resolved.
It’s probably a good idea to consult a r.e. attorney in your locale, now, before you have a much greater need for his services.
January 1, 1970
Question: I am in need of some more advice. I just got back from my house inspection and have discovered several problems with the house. My settlement date is June 28th. My inspector has indicated the following problems: The roof is in POOR condition and needs to have the shingles replaced. No leaking was evident but the condition of the shingles is very bad. The reason for this is that there is no attic ventilation fan and the attic is VERY hot. Thus, the shingles deteriorated more rapidly. I estimate the roof to be about 800 square feet or so.. Another problem that was found is in the Heat Pump.. The venitlator coils are caked with dirt and the filter needs to be replaced. (Is this a major expence or just a routine service thing?) I was told to have it serviced by a heat pump authorized person…
Anyway, those are the only major defects that were found. Everything else seemed to be in good condition.. wiring, plumbing, appliances.. etc.etc… My real-estate agent seems to think that I will be able to get the sellers to pay for an attic fan since there was supposed to be one there in the listing. But she doesn’t think that sellers will opt to pay for a new roof… I don’t have the money to have it done myself, so I was hoping to get them to pay for it. I don’t believe my agent is negotiating my side of things the way she should.. but it’s too far into things to change now. What are my options in this situation? Should I attempt to get the sellers to pay for a new roof, attic fan and service the heat pump or am I expected to pay for all or some of it? Also, if the sellers refuse.. what are my options (other than declaring the contract null and void?) I like the house but don’t feel it is fair for me to pay for a new roof. (Life expectancy of the roof is 0-2 years according to the inspector) If I say I am firm on the contingent of having the seller pay for the expenses, will I lose out on the house if I change my mind and decide to do the roof myself? I am DESPERATE to hear some advice on what to do… I have 5 days to get back to the seller with my demands.
Another point that may be in my favor is the seller has found a home and is looking to settle at the same time. It seems to me that if they don’t want to lose the other house.. the should have to fix this one? Right? Wrong? But I don’t want to lose the house either…so, I’m kinda caught in the middle and have no idea on if bluffing is in order. On one hand, I could say I’m firm on my demands and hope they want the other house enough to fix things up or I could lose out if there is another buyer that I don’t know about.. etc. etc…. Also, if I get out of the contract, I’d be out the money for home inspection and mortgage application…. WHAT’S A GUY TO DO???
I guess I’ve rambled on enough about this… thanx for staying with me! 
NOW… can anyone please shed some light here on my options and/or give me some advice, alternatives, kind words, wisdom, hug????
Answer: Is this person *YOUR* realtor? Do you have a contract with her saying that she works for you? Have the words buyer’s broker ever crossed her lips or yours? If not then you must know that she does not work for you. She works for the seller. She has a contractual obligation to THE ENEMY (the seller, in your case) to realize the maximum sale price for their house. They are paying her to do this. You are not.
this situation? Should I attempt to get the sellers to pay for a new roof, You need to decide RIGHT NOW weather you like your money more than you like the house. If you like the money more, don’t give it up for the house. If you like the house more than you like the $1,000 for all the repairs, then you should give up the money, make the repairs, move into the house and live happily ever after. There is a difference between liking it and doing it. You may not like giving up the money, but if the deal will fall apart becuase you don’t spend it, then you really need to consider weather you are willing to walk away. I can virtually assure you that there will be other houses. It is in your favor that the seller needs to sell this house to buy the next one. You are having doubts and doubts are OK. This is the first time (?) you are buying a house. This is nerve wracking stuff. What I would not do is express these doubts to the realtor if she is not working for you. If you ask her point blank, she will have to tell you who she works for, by the way. The question of “have to” is a difficult one. They don’t have to do anything. They can say, “Hey, screw you, the house is listed for $X and that is the price. Don’t bother me with anything less.” The question is whether you value your money more than you value the house. If so, then say to the realtor, “I’m sorry. I am unwilling to pay for these repairs. Call me if the sellers change their mind. I will be looking at other houses with OTHER realtors.” Let her know that if she does not sell you this house, you and your money (read: her commission) are going elsewhere. The only leverage you have is your money. You have to remember that to the sellers and to their agent, this is about your money. You have it and they want as much of it as the can convince you to give them. You have to decide how much that number is.
Good Luck and please remember what my .sig says.
January 1, 1970
Question: I would appreciate it if someone could give me some pointers on the following issue. We had a lot for sale and put an ad in the paper. Some guy was interested and asked for more info. My husband had put an info packet together which he sent him and in that packet it mentioned that the lot has 1.7 acre buildable land and the paper was signed by my husband. The lot actually belongs to my uncle and my husband does not own any part of it. The city gave us a lot of problem because of endangered species etc. and we were not aware of this. Finally the city said we can pay them $10000/acre to clear the lot. The buyer is now requesting that we pay 17000 to clear the 1.7 acre that was mentioned in the ad or he will bring a lawsuit towards us. We are willing to pay $5000 to clear the property which he wants to build his house on (1/2 acre of the lot)
Can he really sue us for this? There was nothing mentioned about this in offer letter that was signed by him and the owner. If he does bring a suit (and has no case to win) will there be a hold on the lot until the court gives its decision?
All help is greatly appreciated.
Answer: Your message is not specific enough, did you actually sell the lot? IF not, then the answer is no as no real estate transaction is binding on either party until proper papers (in this case a deed) have beeen executed by both parties. Also, unless your husband was authorized by his Uncle to do so, his signature on any document is not valid. However, you did misrepresent facts, which is wrong, but not illegal. Next time put this statement on the bottom of any offering sheet. “All information is deemed to be from reliable sources, but is subject to er errors, ommissions and withdrawl without notice.”
You should also put that “this is not an contract or a substitution for a contra- tract. No document shall be binding on either party until proper documents are executed and xchanged by the parties.
January 1, 1970
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