To BAMI and Others:
Real estate laws limit your ability to utilize all the benefits available to YOU and share them with your tenants. For instance when you rent/lease your property, your tenant gets the use and occupancy. There are other benefits available to you as an owner such as the mortgage int. writeoff, property tax writeoff that you cannot provide to your tenant, and others that are just not safe to provide.
The secret is to convert your real property to personal property. It’s called the “Doctrine of Equitable Conversion”. I’ll offer two alternatives to you but first, REFINANCE at 80% LTV and get a 5-YR ARM Option loan @ 1.25% (it could be slightly higher as your credit is right on the borderline). Your new loan is for $276K, and you can pull out $39K, less costs to use for other purposes. Your minimum payment will be about $910 per mo., plus Taxes & Ins. Your interest only payment is about $1610. That is the lease amt. you will charge. Then:
A Simple Tax Lease; or, A Co-Beneficiary Equity Trust. Both require that you place your property into a Land Trust and deed title to your Trustee (I always use the same prof. non-profit corp. Trustee (He has safely handled thousands of trusts,) You have now taken the same step that celebrities and the wealthy have taken for years – you have converted your home from realty to PERSONAL PROPERTY. Your transactions no longer have to be public, they are private property. In fact, you are no longer governed by mortgage law, but by the UCC., Art. 9. Your trust will provide you privacy and shield you from liens and encumbrances as title is in your Trustee’s name.
- A Tax Lease -
I would grant my tenant a 10% beneficiary interest in my trust, making him an owner of realty in the eyes of the IRS. Set the lease term, say at 2 years, and he pays the full mtg payment including taxes and insurance. The IRS allows him the property tax and mtg write-off, so his after-tax situation is greatly improved and he can afford the higher payment. At the end of the lease, the contract calls for him to grant his 10% back to the trust (you). You have in essence sold the tax benefits for 2 yrs.
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- A Co-Beneficiary Equity Trust. Advertise saying that your home is in a Trust and you need a Live-in Property Manager to live in the property, make the payments on time, and be responsible for maintenance and repairs on a 3-year, triple net lease. Say: “I want you to treat this house with love – as if it were your own. I ask for no down payment – you will only pay closing costs (your cost of setting up the trust, plus 3 monthly lease payments (two of which are held in reserve in case of default”
There will be no bank or credit qualifying. If you agree to this and keep your end of the bargain, I’ll GIVE you the house. How? When you sign the lease and pay the closing costs and advance lease payments, I will immediately assign you a Beneficiary interest in my trust. You will (although only leasing) acquire IMMEDIATE home ownership benefits and are allowed by the IRS to write off the monthly mortgage interest payments and property taxes. I will also share in the future appreciation of the home on a 50/50 basis. At the end of three years, if you want to buy the property, you can do so at Fair Market Value. If you choose not to, there is no obligation or penalty. HE’S FLOORED AND SAYS YES.
The home is worth $345K. You are doing him a great favor. I’d settle on a Mutually Agreed Value (MAV) of say $360K. No down payment, he only pays the cost of setting up the trust (about $2800) plus 2 lease payments to be held in reserve in the event of default. Set his monthly lease payment at $1610, plus taxes and insurance for a regular payment. That should return you about $700 per mo. positive cash flow.
You have just converted your negative cash flow of say $200 per month to a $700 per mo. positive, and instead of losing $7200 over the next 3 years, you’ll make a positive cash flow of $25,200. Your negative amortization will probably equal that amount so you are using your own equity to provide a nice monthly income.
When he REFINANCES in 3 yrs and buys you out for $390K, you get about $125K (the diff bet $235-360K), then another $15K, your 50% share. During this 3-yr period you have also been able to depreciate the home. This is the method I use and have used very successfully. It is safe and private.
SUMMARY:
You turned a loser into a money-maker with proper asset management. This is NOT about real estate. It is about MANAGING your PERSONAL PROPERTY. Your return upon sale will be: $130,000 (less taxes but including negative amort.) profit with solid asset protection and your name nowhere on public records. In addition, you had no responsibilty for the upkeep and didn’t even collect the rent – your Trustee did and sent you a check each month) It’s not immoral or unethical, it is simply good business.
I wish you the very best of luck.
Da Wiz