First Time Purchase
Help! I've been interested in getting started in real estate investing for a few years now. An opportunity recently came up. A friend of mine's business partner is looking to sell his 4 flat in Chicago (no brokers yet). Good location and the building is in pretty good condition. My concern is im not sure if its a really great deal.
The property is a 2 flat in front and 2 flat (coachhouse) in rear. The front unit has an 'illegal' attic unit, so there are 5 rent generating units. Gross revenue is 61,740 with the rents at market... I estimate NOI at 41k. The seller wants $780k.
I estimate that with conventional financing the investment breaks even on cash-flow basis at those levels.
My question is -- is this a great deal?
And can I take the depreciation (which then presents significant annual losses) to offset my W2 income if I am highly compensated at work?
Thanks - any tips much appreciated...
Will this be considered a residential or commercial (5 units or more) loan? Your debt service is likely to be higher with a commercial loan for the loan amount you will need. The commercial loan will also require a higher down.
I would not call this a "great deal" in terms of cash flow. My smell test is that a property needs to be positive pre-tax.
Another issue is that if you are highly compensated, you may not be able to deduct much or any against earned income. The general rule is that passive (real estate) losses can offset earned income up to $25K if you earn less than $100K per year. This is reduced linearly to zero with an earned income of $150K. This is for a single person. You might want to see if there are differences if you have a spouse and file jointly.
[ Edited by edmeyer on Date 10/14/2004 ][ Edited by edmeyer on Date 10/14/2004 ]
Thanks - great points. I agree with your smell test. I can finance this as an owner occupied multi-family investment property since there are 4 units.
This provides for 90% cltv and favorable interest rates. As such it passes the smell test.
2 questions:
Does anyone have experience in owner occupied financing which you may not occupy after closing?
Does anyone have experience in treating investements as active rather than passive investments to allow depreciation to offset W2 income?
Many thanks!
This is a quote from a website.
"You are not limited to $25,000 in rental losses on your tax return if you are a real estate professional. If you spend more than one half of any job or business related time doing your real estate business and spend more than 750 hours on your real estate business, then you are a real estate professional. EXAMPLE: You own 10 rental houses for which you personally spend 1,350 hours during the year doing work related to those homes. You are also a school teacher and spend 1,300 hours during the year in the class room. Since more than half of your professional time is spent on your real estate business and you meet the 750 hours test, you are a real estate professional. "
I have asked the "active" versus "passive" question to my tax guy in many different ways. The IRS has made it very clear that real estate investment activity is passive income.
You will probably get some responses on the owner occupied financing. If you "move out" within a week after you close you may have difficulty convincing a lender that your intentions were to occupy the property.