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Old 11-13-2013, 01:28 PM
Status: "I am in preparation mode!" (set 4 days ago)
 
5,513 posts, read 5,494,602 times
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Quote:
Originally Posted by thelopez2 View Post
I'm pretty sure you don't want anything to change in a couple of years. The guidelines makes sense. Try comparing your 75% of gross minus expense and compare that with your 100% gross minus all of your expense on schedule E and minus principal. This is cash flow and should be added or deducted from your regular income.

Depending on how much equity you've paid down, not gained through appreciation, you might want to consider refinancing to change your monthly obligation. This really depends on the interest rate and balance. Also even if you are paying more in interest buy you need to do it for growth reason, that is just the cost of doing business, which sounds like what you are trying to do, empire building.

What state do you live in?

CLTV Combined loans to Value all loans on the property divided by the property value.

I don't know why it would be 'considerably lower' was it vacant? Do you have a professional accountant you can ask questions? If you did I have some questions you can ask them.

Is the whole reason you are waiting to buy in a couple of years is because you feel you can't get a loan now?
It is going to be lower because of the tax deductions.

i.e If the rental income is $1000.00 per month, my annual rental income would be $12,000. I am allowed to deduct items such as mortgage interest, maintenance, repairs, etc. Let's say, I am allowed to deduct $5000.00. My net is $7000.00. I am only allowed to count 75% of that amount as income to offset the mortgage.

I have thought about refinancing since my rate is 5.25. I have over 6 figures of equity in the property.

I am not ready to buy. It is part of my 5 year plan. I am just looking for options to help me strategize.
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Old 11-13-2013, 02:24 PM
 
Location: Southern California
4,350 posts, read 4,929,984 times
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Quote:
Originally Posted by goodlife36 View Post
It is going to be lower because of the tax deductions.

i.e If the rental income is $1000.00 per month, my annual rental income would be $12,000. I am allowed to deduct items such as mortgage interest, maintenance, repairs, etc. Let's say, I am allowed to deduct $5000.00. My net is $7000.00. I am only allowed to count 75% of that amount as income to offset the mortgage.


I have thought about refinancing since my rate is 5.25. I have over 6 figures of equity in the property.

I am not ready to buy. It is part of my 5 year plan. I am just looking for options to help me strategize.
You're doing it wrong, the 75% is suppose to account for the vacancy and repairs, once you show it on the Schedule E you'll go with 100%. As you can see in your example you stated you 1) deduct the interest, but then 2) deduct the mortgage, after taking 3) 75%, you are hitting your income three times.

Look at your net on Schedule E add back the depreciation, amortization, and interest, now subtract the principal and interest for the year, there is your net, no need to take 75% of it. This is a quick and simplified calculation.

The equity has to do with a % not a number of figures. If you have 30% equity at $100,000 in equity (70% LTV), you'd be in a better position than $200,000 at only 5% eqiuty (95% LTV)

The 5.25 rate sounds pretty high, so I'm thinking you don't have a lot of equity and are doing lender paid PMI. If I'm wrong and you do have 25% equity, you should consider refinancing unless the loan is too small.

People will say don't refi and get into a new 30 year loan , but this is because most people lack discipline to maintain their current payment. If you lack discipline take a shorter term loan, but this will real hurt your borrowing power in the future as you want to continue to hold this property and buy more.

Is your plan based on developing and dependent on increasing rental income? If so you need to look at is as being able to service your debt.

Congrats on having a 5 year plan.
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Old 11-13-2013, 03:38 PM
Status: "I am in preparation mode!" (set 4 days ago)
 
5,513 posts, read 5,494,602 times
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Quote:
Originally Posted by thelopez2 View Post
You're doing it wrong, the 75% is suppose to account for the vacancy and repairs, once you show it on the Schedule E you'll go with 100%. As you can see in your example you stated you 1) deduct the interest, but then 2) deduct the mortgage, after taking 3) 75%, you are hitting your income three times.

Look at your net on Schedule E add back the depreciation, amortization, and interest, now subtract the principal and interest for the year, there is your net, no need to take 75% of it. This is a quick and simplified calculation.

The equity has to do with a % not a number of figures. If you have 30% equity at $100,000 in equity (70% LTV), you'd be in a better position than $200,000 at only 5% eqiuty (95% LTV)

The 5.25 rate sounds pretty high, so I'm thinking you don't have a lot of equity and are doing lender paid PMI. If I'm wrong and you do have 25% equity, you should consider refinancing unless the loan is too small.

People will say don't refi and get into a new 30 year loan , but this is because most people lack discipline to maintain their current payment. If you lack discipline take a shorter term loan, but this will real hurt your borrowing power in the future as you want to continue to hold this property and buy more.

Is your plan based on developing and dependent on increasing rental income? If so you need to look at is as being able to service your debt.

Congrats on having a 5 year plan.
I do not understand the first paragraph. I will revisit it when I get my taxes done. This will be my first time reporting rental income.

I am at 55%. My rate is high because I never took advantage of the low rates. I did not want to increase the life of the loan or incur those high refinancing fees. I am half way through and I anticipate it will be paid off by the time I am 55. However, refinancing is an option that I will have to seriously consider if I cannot get around the law. I will just have to be disciplined and make extra payments. This would be a last resort.
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Old 11-13-2013, 11:26 PM
 
Location: Southern California
4,350 posts, read 4,929,984 times
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Quote:
Originally Posted by goodlife36 View Post
I do not understand the first paragraph. I will revisit it when I get my taxes done. This will be my first time reporting rental income.

I am at 55%. My rate is high because I never took advantage of the low rates. I did not want to increase the life of the loan or incur those high refinancing fees. I am half way through and I anticipate it will be paid off by the time I am 55. However, refinancing is an option that I will have to seriously consider if I cannot get around the law. I will just have to be disciplined and make extra payments. This would be a last resort.
You'll need two tax returns.

Take your $7000 add your interest back, now subtract your mortgage. There is your income. You don't need to take 75% of that, if you have two tax returns.
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Old 11-14-2013, 01:14 AM
 
Location: Richardson, TX
10,117 posts, read 16,713,055 times
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Quote:
Originally Posted by thelopez2 View Post
You'll need two tax returns.

Take your $7000 add your interest back, now subtract your mortgage. There is your income. You don't need to take 75% of that, if you have two tax returns.
I'm sorry, are you recommending loan fraud?
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Old 11-14-2013, 03:38 AM
 
Location: Southern California
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Quote:
Originally Posted by Debsi View Post
I'm sorry, are you recommending loan fraud?
Where do you see any possibility of Loan Fraud or any suggestion?

Sorry I don't understand your question, the OP wants to know how to calculate income, this is in no way loan fraud, the OP is confused about when to use the 75% calculation. Do I need to cite sources?

http://www.radian.biz/page?name=SelfEmployedCFAnalyzer
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Old 11-14-2013, 07:18 AM
 
Location: Richardson, TX
10,117 posts, read 16,713,055 times
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I read "you'll need two tax returns" and thought you meant one for the IRS and one for the mortgage company for the same year, not two years of tax returns. Sorry I misunderstood you.

Last edited by Debsi; 11-14-2013 at 07:28 AM..
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Old 11-14-2013, 07:58 AM
 
Location: Southern California
4,350 posts, read 4,929,984 times
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Quote:
Originally Posted by Debsi View Post
I read "you'll need two tax returns" and thought you meant one for the IRS and one for the mortgage company for the same year, not two years of tax returns. Sorry I misunderstood you.
I figured that, what it was, I'm bad at getting my thought from my brain to the keyboard. There is a 4506T form which is used by the underwriter to verify what you submit to the loan offer is the same as what you submit to the IRS. Having and submitting two different Tax returns will cause you problems, this isn't the wild wild west like it was just a few years ago.

Back to the original poster and a strategy for 5 years from now just some ideas, when the lease expires, move back in and refinance , then stay for a year, then move and rent it out for another two years. You might be able to save thousands of the next 15 years but getting a lower interest rate and paying extra to match your current mortgage payment.

I think too many people don't want to pay fees and are being penny wise and dollar foolish. Whether it called a fee or interest , it is still lost money, but people have accepted paying interest but don't accept paying fees. You might even be surprise what your payment would be if you took a new 15 year loan even as a non owner occupied loan and rolled the additional cost into a higher balance. If you payment drops and you loan ends at the same time or earlier, then you are saving money.

Here is another idea if your property appreciated. Sell that property and buy a new property with a 15 year loan then rent it out after a year. You might be able to take your profit tax free, except for depreciation, you never know when they will change the tax laws. Buy a new property with a 15 year loan with that big downpayment. Then move out after a year and rent it. You might be able to go from a 5.25% rate to a 3.25% rate, saving thousands a year. Pay extra toward your new loan get pay it off sooner than the 15 years.

Since you accept being a landlord, you might want to look at multiunits.
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Old 11-14-2013, 08:37 AM
Status: "I am in preparation mode!" (set 4 days ago)
 
5,513 posts, read 5,494,602 times
Reputation: 4210
Quote:
Originally Posted by thelopez2 View Post
You'll need two tax returns.

Take your $7000 add your interest back, now subtract your mortgage. There is your income. You don't need to take 75% of that, if you have two tax returns.
I am sorry I still do not understand. Let's us numbers( illustration).

House is worth $100,000
LTV 50%

Monthly rent $1000.00
Monthly mortgage and fees $800
$200 profit per month

Tax return form

Annual Rental Income $12,000
Mortgage interest $5000.00
Maintenance, fees, and depreciation $2000
Total deduction $7000

Net Income $5000. My understanding is that I can count ($5000*.75)$3750 as income to offset $9600 ($800*12). Thus, $5850(9600-3750) is counted as an expense. I would be on the hook for an additional $487.50 (5850/12) per month which reduces my ability to afford a mortgage. The mortgage company I contacted advised that my total debt ratio can not exceed 45%.

It would be nice if they could count the full rental amount of $12,000. It just seems crazy that it is reduced to $3750 when I am making money on the property. However, $9000 would be doable ($12,000*.75).

Based on what you stated above, I should take $5000(net income) +5000( mortgage interest)= $10,000-9600(annual mortgage)= $400.00. How does this amount offset my annual mortgage of $9600?
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Old 11-14-2013, 10:01 AM
 
Location: Southern California
4,350 posts, read 4,929,984 times
Reputation: 2129
Quote:
Originally Posted by goodlife36 View Post
I am sorry I still do not understand. Let's us numbers( illustration).

House is worth $100,000
LTV 50%

Monthly rent $1000.00
Monthly mortgage and fees $800
$200 profit per month

Tax return form

Annual Rental Income $12,000
Mortgage interest $5000.00
Maintenance, fees, and depreciation $2000
Total deduction $7000

Net Income $5000. My understanding is that I can count ($5000*.75)$3750 as income to offset $9600 ($800*12). Thus, $5850(9600-3750) is counted as an expense. I would be on the hook for an additional $487.50 (5850/12) per month which reduces my ability to afford a mortgage. The mortgage company I contacted advised that my total debt ratio can not exceed 45%.

It would be nice if they could count the full rental amount of $12,000. It just seems crazy that it is reduced to $3750 when I am making money on the property. However, $9000 would be doable ($12,000*.75).

Based on what you stated above, I should take $5000(net income) +5000( mortgage interest)= $10,000-9600(annual mortgage)= $400.00. How does this amount offset my annual mortgage of $9600?
Assumption
$800 a month = mortgage , taxes , insurance, hoa, management fees, etc.
$2000 depreciation and maintenance has to be separated, I used all $0 for maintenance for illustration.
If depreciation was $400 and maintenance was $1600, you only get to add back $400 versus the $2000 that i used in example.

Calculation 1 - keep in mind you can't do this unit it show up two years of returns
$5000net income + $5000interest+$2000 depreciation ( you need to break down depreciation versus maintenance repairs are not depreciation) = $12,0000 - mortgage $9600 (this is where it is offset)= $2400. or $200 a month added to your W2 income. Take your monthly (W2+200)*.45 = maximum monthly debt. There are some cases you can go higher than 45% , but I'm using your stated 45% that is what someone already told you.

Variation 2 with $400 depreciation versus $2000
5000+5000+400 =10400 - $9600= $800 /year or $67 month


Calculation 2 - Some may do this as "departing residence"
$12000 x.75 = $9,000 rent - $9600 (mortgage ,tax , insurance, hoa,etc) = $-600 annual or $-50 subtracted to your W2 income

Do you see these two numbers are pretty close. The 75 method is more conservative , you lose more money.

Depending on what state you're in, I might have a good referral for you.

Do you see you are in better position that you initially though.

Last edited by thelopez2; 11-14-2013 at 10:19 AM..
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