Finance guys, accountants, etc

[derekhonda]

Ok, I'm schemeing again. I'm trying to think back to all my Finance classes in school, but I just can't remember how it plays out. Let me paint you a scenerio.

Investor buys a property at a firesale in cash. Pays 20,000....property is worth 50,000 just as it sits. Sinks 10k into said property, now believes property is worth $75,000, with only his 30k investment. Plans on renting it.

Wants to buy a second investment rental, but is all out of money.
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Ok, now what I am remembering, is a theory called ??over mortgaging??...or something to that effect. Normal people only get a mortgage on what they owe, But this is different because you free up money based on what the asset is worth, and the money is tax free.

So you get a mortgage for $75000, (or whatever it does apraise at.)

Then you take the 30k from your investment and put it back in the bank, and still have $45k to do it again.

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So, can anyone steer me to any literature on this, or have any pros and cons that they have experienced.

[Balaz_73*00]

Ok, so you say its worth 50k. He has 30k in it. He would only free up 20k if it really is worth 50k, this 75k you speak of is irrelevant. Clearly fair market value is ~20k, not 50k. Even in this case of a firesale, the guy forced to sell no matter how urgent would be able to get more than he owed. Your friend who paid 20k might have recieved a slight discount but Im sure not 30k worth. Fact of the matter is he has roughly 30k into this property. While it may have been worth 50k in the past, our economy and housing market is crap. Get it appraised and check for youself, got me curious. The mortgage he could get will be the appraised value of the property after the 10k in improvements.

[quad2xtreme]

basically you are saying that the fair market value is $75,000. You owe 20k so the equity you have is $55,000. The 10k is meaningless in this equation unless you borrowed it too to make the improvements. Then your equity is $45,000.

Essentially, you are trying to borrow against the equity in your property...or borrow the full amount of the fair market value while paying off existing loans.

No bank is going to loan at 100% of fair market value...but in your example, you could expect to have some money freed up for another investment based on the equity you built up in this property.

[Ntensweapon]

A couple of things... Lending practices have changed since the sub prime market closed. The days of 100% financing are over. Banks need the buyer to have something to lose in the property. On top of that when you are talking investment property..the rules differ from owner occupied. Some banks still require 10 or 20 percent down no matter what equity is. There are also rules regarding how much cash a buyer can receive at closing. One strategy you can still use to leverage your equity is a second mortgage (if you have a first) Or a secured line of credit. I would only do this to free up cash to expand into other things like you mentioned.
There is still opportunity for creative financing if you have strong credit, a proven history, and good local bank who knows/trusts your intentions.
One strategy I have used on boths sides is a short term contract. Buyer makes a down payment to seller (less than bank desires) Payments are setup with terms. After a year the buyer can take the balance to the bank for a mortgage. Since the buyer has been part legal owner for 1 year, they look at it as a refinance. Making closing the loan much easier. The advantage is freeing up cash for improvements or other purchases. Like I said, I've worked this angle as a buyer and a seller.

Not a banker or an accountant. I have been investing in real estate for 8 years. I'm not claiming to be an expert but I have picked a few things along the way.

[derekhonda]

Originally posted by Balaz_73*00
Ok, so you say its worth 50k. He has 30k in it. He would only free up 20k if it really is worth 50k, this 75k you speak of is irrelevant. Clearly fair market value is ~20k, not 50k. Even in this case of a firesale, the guy forced to sell no matter how urgent would be able to get more than he owed. Your friend who paid 20k might have recieved a slight discount but Im sure not 30k worth. Fact of the matter is he has roughly 30k into this property. While it may have been worth 50k in the past, our economy and housing market is crap. Get it appraised and check for youself, got me curious. The mortgage he could get will be the appraised value of the property after the 10k in improvements.

You are looking at it just as what is invested, not its value, thats where this situation is unique. And its worth say 50K "as it sits" after 10k in renovations, I am saying it was a value added renovation and it gained value...value that can be borrowed against.

And I know the markets are down, youd be hard pressed to find a person who wasnt aware of that. It was worth $86000 when it sold for that in 2006, as that was the price paid. After the person turned it back over to the bank, they let it go much cheaper.

[derekhonda]

Originally posted by Ntensweapon
A couple of things... Lending practices have changed since the sub prime market closed. The days of 100% financing are over. Banks need the buyer to have something to lose in the property. On top of that when you are talking investment property..the rules differ from owner occupied. Some banks still require 10 or 20 percent down no matter what equity is. There are also rules regarding how much cash a buyer can receive at closing. One strategy you can still use to leverage your equity is a second mortgage (if you have a first) Or a secured line of credit. I would only do this to free up cash to expand into other things like you mentioned.
There is still opportunity for creative financing if you have strong credit, a proven history, and good local bank who knows/trusts your intentions.
One strategy I have used on boths sides is a short term contract. Buyer makes a down payment to seller (less than bank desires) Payments are setup with terms. After a year the buyer can take the balance to the bank for a mortgage. Since the buyer has been part legal owner for 1 year, they look at it as a refinance. Making closing the loan much easier. The advantage is freeing up cash for improvements or other purchases. Like I said, I've worked this angle as a buyer and a seller.

Not a banker or an accountant. I have been investing in real estate for 8 years. I'm not claiming to be an expert but I have picked a few things along the way.

Ok I think you an I are on the same page Yes there is equity built up in said investors personal house, and that can be borrowed against. Just looking to keep things seperate, and to be able to generate enough money through well purchased investment properties to keep being able to purchase properties, if that makes any sense.

Like I said, this was something I learned in a finance class back in 2006, and there has been a total makeover in lending practices since then. Back in the 90's/early 2000 i think the only thing you needed to get a loan was a pulse.

My thinking is, If you can get 4 rental houses, taking out 2 mortgages, and not tying any personal guarantees to anything, you can't go wrong...as long as the cash flow is there from the rentals.

[SRH]

just out of curiousity why wouldnt you try to sell the property for market value put your initial investment back then use your profite to invest in a similar fixer upper property, bi pass the bank and what not

[derekhonda]

That is a good point, but you will pay hefty taxes on your profit. By keeping it less than one year, it is taxed just like regular income and taxed somewhere in the 30% range. I'm trying to get around that. Keeping it over a year then capital gains taxes are all that is paid, and you can roll investments into other investments, and your suggestion would then make a lot more sense. Atleast...that is how I understand it.

[Ntensweapon]

Before your are remotely close to a 1031 tax deferred exchange, be prepared. While simple in nature, They require you to have all your T's crossed and I's dotted. You have a pretty small window to announce and execute your intentions.
My best advice to you would be to find a good cpa versed in real estate and a good real estate attorney. Its nice to have someone to call and question certain scenarios. Some realtors are good too, especially if they specialize in commercial property. Most agents are just open house hosts. Find an agent that is an apartment specialist or owns a bunch of units.

I like your thought process. I was the same way when I started. Now I'm wanting to downsize/sell out. I bought my stuff kindof young. Newly married no kid. now I have a 4 year old. I have less time now. I've started another business and want to shift my efforts into that.

[derekhonda]

Yep, That time will be down the road as far as rolling investments, but hopefully not too far down the road.

Yeah I just figured now as beat down as prices are, and as many vacant homes are sitting around, its a good time to buy. I bought my personal house about a year ago forclosed and fixed it all up, actually had a blast doing it. I was kinda sitting around this summer and on my 25th birthday i was just like, what do I want to do with this life. I have a job I do enjoy, but just a little something extra was still desired. Decided I had had the most fun just fixing up my house, painting in spare time, fixing up a bathroom over the weekend. Just something I enjoyed, so I'm looking to do it again and again and again.\

Have you ever thought of turning your houses over to a management company? They will usually take a hefty fee...which sucks...but then you have no work to do. They find the tenents, sign the lease, fix up damage, etc., and send you a check each month. Might think about doing that for a couple years instead of unloading them on an already flooded market at a surely discounted rate.

[derekhonda]

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[derekhonda]

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[Ntensweapon]

Yes I have thought about management. Actually the ones around here usually cover their fee with rent increases. It may come to that. I just have control issues. My three plex was flooded in 08. I assumed some extra debt with the remodel. So selling that one anytime soon is not an option anyway. But it's all brand new so that one is easy.