Finacial advice for a newbie investor

I need some advice on getting started with purchasing a rental property or two. I’m thinking of pulling some equity out of my home to purchase a rental home. A little info:

Just my wife and I, our home has been appraised at $420k, we owe $145k, 4.5% APR, about 12 years left. We’ve purchased the home new in 1994.

I’m thinking of re-financing our home and pulling out $100k. I would take that money and put about $25k into a remodel on our current home, and take $12k and pay off a car loan. Paying off the car would free up $600 / month. I would then have about $60k to put down on a rental, or $30k on two rentals. A positive cash flow is a must.

I know I’ll be sacrificing my current low interest rate, but at the moment I’m getting raped on taxes as I have virtually no write-offs. My wife and I currently claim ZERO deductions and still pay extra to the government every month. There has to be a better way. I’m 90% thought “Rich Dad, Poor Dad”, and I need to learn how to “make money”. I’ve thought about a HELOC but most of these are variable and I really don’t want to increase my monthly expenses. The refinance would lower my payment if I went 20 or 30 years.

I plan on registering a business very soon and will start tracking expenses as I start this endeavor. I’ve been reading these forums and searching for properties, but I really can’t act on anything until I have some cash in hand, so I’d like to get this financial issue resolved.

Comments and/or advice would be greatly appreciated.

  1. I’d do HELOC instead of refi your current loan. 4.5% is GOOD! You mention getting a higher deduction but you have to remember you’re only gettting a percentage back of what you’d pay in higher interest. Even if you are in the highest tax bracket and in a high tax state, you’re not going to get more than 50% of that extra interest money back. Would you pay $10k in additional interest to get $5k back in taxes? Keep doing that and you’ll be broke in a hurry. That whole tax deduction mentality is created by the mortgage industry to encourage people to borrow more money.

  2. You’ll gain deductions from the depreciation on your rental properties. Form a business entity and deduct business expenses as advised by your CPA. CPA can tell you which entity makes the most sense for you.

  3. How much you need to put down on rentals will depend on a ton of factors. You’re right in that you want to have a positive cash flow after all expenses. Most people understimate their operating expenses for rentals. The experienced guys here always site the 45-50% of gross rents number.

If you’re going to purchase rental properties, it might be a good idea to look at multi-family units. Your returns tend to be higher and the management is somewhat easier because they are all under one roof. Be aware that if you go above four units, the financing rules change and it is probably a little more difficult to get conventional financing on buildings with more than 4 units. However, the larger the building, the better in terms of cash flow and vacancy rate. Of course, purchase price is always going to be a factor and that’s the same no matter what size building you look at. I would agree with Marcus about preserving your 4.5% rate. IF you purchase the right property with enough cash flow, you should be able to cover the payment on your HELOC without a problem.

if you are refering to your “business” being a rental business you need to be aware that rental activities go on SchE and only expenses directly related to that rental activity are taken on that form (along with depreciation). However, be aware that if you AGI is above $100k, losses from this rental activity may only be partial taken against active income (are total suspended above $150k AGI for married couple). There are several ways to “unlock” those losses. consider sitting down with a tax professional before you get started.