Financing rental property

HardDrive · 03-20-2006, 02:06 PM

I have been looking at purchasing rental property.

The idea would be to rent the property at a loss, write off everything in sight, then make money at the far end, selling when ever the market heats up again.

A) Is this a valid strategy to reduce our taxes?

B) Would a traditional mortgage make sense? I understand that rates are 1-2% higher if you are financing a rental property.

C) In reading IRS Publication 527, it make it sound like we will not be able to write off losses if our income is above $150K. It that accurate?

jhc · 03-20-2006, 02:24 PM

A) Not if you make over 150k. It's no fun to lose $500 or more per month even if you have a capital gain plus you still have the hassle factor and the possibility of major repair sometime.
B) You could get an adjustable that is fixed for the length of time you own it i.e. 5yr or 10 yr. ARM. If you have good credit it might only be half point above regular rates. But the downpayment is 25% for investment property.
C) True, but you can carry forward your loss and add to cost basis when you sell. If you depreciate it will be recaptured (lower your cost basis) when you sell.

turbo6bar · 03-20-2006, 02:35 PM

If you are not an active investor, you will be limited to losses of $25k per year. This may be affected by your income level.

You are essentially eliminating two strengths of real estate investing: cash flow and appreciation, in exchange for the tax benefits and equity paydown. Tread with caution.

RE is good for building wealth, but unless you utilize a 1031 exchange, eventually, the taxman will get his share.

motion · 03-20-2006, 05:16 PM

Rates for investors are about .5% above owner-occupied rates. Plenty of programs out there with only 10% down.

HardDrive · 03-20-2006, 07:08 PM

Quote:

Originally posted by motion
Rates for investors are about .5% above owner-occupied rates. Plenty of programs out there with only 10% down.

Such as?

motion · 03-20-2006, 07:13 PM

Gotta dig around. Try LendingTree through Costco (you get a $400 Costco cash card with each mortgage and closing costs are only $295). They really vary from state to state. Talk to a mortgage broker if you're willing to give up a point for their commission. When I shop for new rates, I apply with 5-10 lenders to find out which program fits me best.

Jims5543 · 03-20-2006, 07:22 PM

I had to plunk down 20% for my investmant property. I wish I could have found 10% it would have saved me a lot of out of pocket.

jhc · 03-21-2006, 02:40 AM

The less downpayment the higher your payment and probably higher interest. We had a 66% gain in one year, more than what we expected in 5 years. The problem with appreciation is that property taxes go up too while rent has remained stagnant. We will probably sell this year.

JohnC · 03-21-2006, 11:33 AM

What about a commercial property such as a multi unit building in an industrial park? Are mortgages looked at the same whether they are residential or commercial?

Big Ed · 03-21-2006, 01:45 PM

Quote:

Originally posted by JohnC
What about a commercial property such as a multi unit building in an industrial park? Are mortgages looked at the same whether they are residential or commercial?

No, not at all. Commercial is a different beast entirely. Expect at least 20-30% down, outside of that the borrower's credit is not as important as the financials on the property itself. Different lenders, different rules. Small commercial loans are hard to get, because the properties are relatively illiquid, default rates are high. These tend to run a full point higher than residential rates, or more.

turbo6bar · 03-21-2006, 02:17 PM

Anyone seen CAP rates on commercial properties above 8? They aren't throwing off a lot of cash, it seems.

motion · 03-21-2006, 04:54 PM

Yes, I've seen 9.5 cap rates on multi-family, but we're talking $5 million and above properties.