Need Financing Advice
I am using a home equity loan as investment capital to start buying rental property. Is it better to put less money down and be able to buy more property, using my reserves to pay negative cash flow expenses as they may arise? My CPA says that in my tax bracket, I will not be able to deduct anything until I sell (expenses, depreciation, etc). My credit score is 716, if that lends anything to the picture. Thanks for any info!
Lower down payment may be desirable, however, with negative cash flow you will be limited in number of properties you can buy. What I have done is to buy multiple properties where some are in high appreciation areas with some negative or break even cash flows and others are in high cash flow areas with lower appreciation so that the high cash flow properties can help support my addiction to high appreciation properties!
In general, I make it a rule that my portfolio is net positive cash flow. I have just recently made purchases that by themselves are slightly negative.
Thanks for the info! I am looking to buy in Arizona where the market is very hot and where appreciation is high. However, I would prefer to rent and hold for as long as possible. Am also concerned about the change in the 1031 exchange law that means I need to hold for five years to be able to rollover my profits into new rental property. I think five years would be my limit to hold. What type of loan would be best among the options? Interest only? 5/1 arm? or any other product that would give me a fixed rate for the term I want to hold the property?
Quote:
On 2005-05-07 17:49, addgirl wrote:
Am also concerned about the change in the 1031 exchange law that means I need to hold for five years to be able to rollover my profits into new rental property.
I am new at this...so I may be missing something, but the only 5 year rule I have heard of regarding 1031 exchanges is the rule that applies to 1031 property that you "convert" to a primary residence. This type of property you DO have to hold for 5 years (I think). All other 1031 property does NOT have a required hold period. (You DO, however, have to hold it long enough to show "intent" to rent. This means different things to different people, but I have read as little as 1 year is sufficient, and certainly two years appears to be fine. If the IRS is not convinced that you "intended" to rent the property, they may rule that you "intended" to hold for re-sale, thus disqualifying your 1031 exchange.)
Can someone correct me?
I just completed a 1031 exchange and at that time there was no 5-year holding rule. I doubt that has changed.
Second, I exchanged into properties in Phoenix. While I am enjoying very nice appreciation, there are issues of rental inventory. As you may be aware, there are many investors in Phoenix properties so there is an issue of filling vacancies. I am close to being full, but it has taken more than a few months.
My previous post referred to the properties in Phoenix. I almost own a multi-unit free and clear and I have houses that were 90% financed at time of purchase. The houses are close to break even and the multi provides reasonable cash flow--provided vacancies are reasonable.
The Phoenix market is one of those markets where cash flow is not bad with very good appreciation. This will change if it has not already because of the energetic appreciation.
With regard to financing, you can certainly use an ARM that goes out to the limit of your holding horizon. When I was starting out I made it a rule to have financing so that I can hold onto a property indefinitely. The reasoning is that you cannot predict market conditions at the time a balloon comes due or other events that may force some action. I have tempered that a bit and now will use ARMs but not on very large loans. I have learned the wisdom of this because I had a very good rate for two years that converted to an adjustable on a good size loan. Fortunately, I have just been approved for a 30 year fixed and the market is very hot and I have enjoyed excellent appreciation. At the time of purchase there was no alternative for acquiring the property.
I hope this is of some help.
Regards,
Ed
about the 1031, not exactly sure about everything, becuase i am not a tax consultant, but i have picked up a few things from am talk show.
first off u should talk to an accountant.
1031 exchange allows you to roll over any profit made into a new property with in a certain amount of time, 2 months i think, and eliminates taxes on the profit. as for the 5 year number, you are talking about not using a 1031 and just taking the money. if you held the property for less the 2 years its short investment tax and 5 year is long term, which is much lower, or somtheing similar. anyopne actually know for sure, let me know...
I would suggest that you first determine what uses and the development density the current zoning permits for the property. Go to the municipal office and look at the zoning map and zoning ordinance. also look at the utility mapping to see if public water and sewer are available to the site.
Nancy