Alot of you know here that i rehabbed this house using my credit cards ect. Well anyways, the house has only been on the market for about a month now and i have had no offers.This doesnt scare me as i definitly know i can get it sold but I do know it takes time. Anyhow, my low interest rates are about to go prime here in the next month or so and i need to refi it. Here is what i am thinking right now.
The House appraises for $45,000 so I will
Refi. House for $30,000. ($18,000 material and $12,000 for my labor so i will be pocketing the $12,000)
P&I = $222 per month
Taxes = $71 per month ($850 per Year)
Insurance = $38 per month ($450 per year)
10% Vacancy= $55 per month
Maintanence/management 10% =$55 per month
Total = $441 per Month
Rent = $550 per Month
Positive Cash Flow of $109 per month
The question here is that ive owned the house for 3 months now and need to know if i Refi the house for $30,000 and pull out the $12,000, will i need to pay taxes on that even though im not selling the house? If not, when, or if do i have to pay taxes. I think after 2 years i dont have to pay capital gains taxes here in Neb/iowa. Im just wanting to get money for what i have done so far and dont want to wait any longer cuz there are a couple others out there that i am looking at, but dont want to get into them until i get something going on the one i have. I dont want to dig my own grave if you know what i mean. Thanks
You never have to pay income tax on borrowed money… 
If you sell it before 12 months, the profit is taxed as ordinary income. If you sell it after 12 months, the profit is taxed as capital gains.
Keith
ok, thanks KD, that is what i thought, but wasnt sure…
What is your(and others) opinion on doing this? Yay, Nay? This would be my second rental property and will be the one that starts making good cash flow,and only 67% loan to Value ratio, and the biggest reason for wanting to do it is to work on the next property.
I’m a “buy and hold” investor…my opinion is that if you can make a decent cashflow, hold the property…
Keith
Using your numbers:
30,000 Loan with a P&I of $222 then I conclude you’re basing this on a 30 year fixed at 8.125% interest.
At 7.0% your P&I would be $199.59 per month.
I mention this because it’s quite easy to get 7% and 8.125% is really high for a cashout, even for Non Onwer Occupied.
Here’s another idea. At 90% LTV (cashout refi) at 8.125% your P&I would be 300.72 per month. So given your other number you would no longer cash flow but you would pocket an additional $10,500. At your previous cash flow numbers this means that it would take 95 months to hit the ‘break-even’ point. I would assume you’d sell the property sometime before the 8 year mark so you’d almost certainly be better off doing a max LTV cashout refi if your credit / ratios would support such a loan.
I like the notion that while Cash flow is great, Cash Reserves are better. Anyway, it’s another approach, your actual mileage may vary.
Actually the loan would be for $33,000 at 7.125% including the $3,000 closing costs. I will shop this rate/closing costs as well. I think i can probably find something with cheaper closing costs, but we’ll see.
and actually if i did do 90%LTV at 7.125 (i dont know if it would still be this low) i would still have a cash flow of $58. Also note that i do my own maintenance and management, so i could possilby have even more depending upon how much i have to spend in maintanence. KD, what is your approach on going with more money in the pocket and less cash flow?
Well, 3,000 in closing costs on a 30,000 loan is extremely high. Beware of the junk fees. I don’t want to aggravate any LO’s or Brokers here but as an Underwriter I get a good laugh at some of the Good Faith Estimates I see.
At a $40,500 loan amount your P&I would only increase your P&I to $272 and still bring in $7,500 (assuming you still have 3k in closing costs as junk fees are static and not based on loan amount so only origination and title insurance would increase because the loan amount increased).
Now your break even point is 150 months. I’d still do a max LTV cashout but that’s me. Even with PMI of $32 or less you’d break even in 91 months.
DfW, What do you mean by “my break even point” ?
how much rent can you get? have you locked into a lease agreement witha renter? are you charging enough rent to allow a cashout refi without upsetting your DTI?
Here’s what I recommend: PITI x 1.35 = minimum rent
You can figure out at 90% LTV what your payments are after the cashout refi, and use that as your new PITI - are you going to be able to get that in rent? Will the price for rent compete with other rental properties in the area?
A lender will only look at 75% occupancy rate, hence your net rent could generate a positive or a negative cash flow and increase your debt to income ratio.
If all the numbers look good - go for it!
black…
I play cautiously around the higher draws against the equity. I always take an 80% 30-year fixed. Then, there is no additional amount to pay (either an upfront fee, PMI, or 2nd mortgage)…I did one last night for $57,600 at 6.75% (rates are creeping up), no points, $2100 in closing costs.
I use Hibernia (I think they lend in Texas, too)…
Keith
I will look into Hibernia. I used Ditech.Com for my last home i did. They were ok, but i did a second mortgage with a high interest rate, but no closing costs. I will probably refi that here in a few months to get the interest rate down. Right now i am looking at 7.125% with about $2,300 closing costs and having to buy 1.5 points for like $495 for a total of about $2,900 closing costs. Im also going to shop some of the local banks on this as i can probably do better being its under 75% loan to value.
Black,
What I mean by break even point is the point where two scenarios are the same. Since the actual figures are yet to be determined I’ll use round numbers to illustrate the point.
Using your example before you’d pull out $12,000 and make $100 a month in positive cash flow.
Using the other example you pull out $12,000 + $7,500 more (you’re loan amount would increase but assuming the majority of your cc’s stay the same since they are fixed and not dependent on the mortgage amount. i.e. appraisal costs the same if you borrow 100k or 10k, title escrow fee is the same, etc.) and make $15 a month in positive cash flow (this number is because of the $50 increase in your PITI and $30 in Mortgage Insurance).
So the difference in the numbers is $7500 in cash and $80 a month in cash flow. If you divide $7500 by $80 you get 93.75 months before the two deals generate exactly the same amount of money to you. So your break even point is 93 months. If you keep the property for 93 months or less the 90%LTV cashout creates more money in your pocket. If you keep the property for 94 Months or more, the original loan program you mentioned makes more money for you.
Now, there are some other items to consider. What would you do with the $7500 now? Are you losing out on deals because you have equity tied up in a home and not liquid enough to move on the deal now? What if you have all this equity in your house but it’s vacant for 6 months? With $7500 in the bank you can sustain longer periods of time vacancies or the unexpected expense.
KD is a seasoned investor and I respect his input on all subjects. I do however, disagree with his assessment of keeping the LTV at 80%. That makes sense for your primary residence that you plan on holding for many years, but to me, the great advantage of Real Estate is the ability to use maximum leverage. By keeping equity in a property, you’re hamstringing the greatest advantage of investing in real eastate.
I agree with your theory of taking out 90% LTV in some cases. I could take out the exta$7,500 but then do what with it? I could use it on a down payment for another house or something, but its not gonna give me much of an advantage. In my situation this is whats happening. I will get the refi for $30,000, and i will pay off my initial investment of about $19,000 and then pay off some other debts totaling about $6,000. Then the extra $5,000 will go into my pocket, well $2,000 will goto my g/f that helped me quite a bit on the house. After everything is paid for, then i have $30,000 in open Credit Cards to persue my next investment house. To me having the large amount or percentage of equity in the house is important to me as if it ever came down to it that i needed money, or needed to sell the house, it wouldnt be too hard to get myself out of the trouble. I mean it is nice knowing that I would have a large sum of cash siting right there, but i think i would rather have the monthly cash flow coming in and be able to pay off principle faster. I do want to use my rental properties as my possible retirement income. If i have 6 to 7 houses in the next 2 years, then when those are paid off in 20-30 years, i can retire at age 50-55 off of just those properties, which in fact i would have a bunch more. But i do appreciate your advice and input on this topic as it is another way to look at it.
Ok, im set on renting the house out now. Next question is. I currently have the house on the market with a 180 day agreement. i have had it listed now for about 35 days. How can i get out of the listing agreement and take it off the market? I need to do so in order to get my loan.