I’m looking at purchasing two homes to keep as long term rentals in Texas. I want to put as little down as I can while still generating positive cash flow. While I’m evaluating 100% financing, I think that 5% or 10% down is more likely.
Onto my question - with less than 20% down I will either have to take out a 2nd loan, or pay PMI. Is one preferable, or should I just pick the one that results in lowest monthly expense?
If this was my personal residence I would take the second loan as that interest is deductible. On a rental property as I understand it, mortgage interest is not deductible (please correct me if I’m wrong).
I am an obstiate, stubborn SOB (and have been told that often enough, so just hold your tongues!) and I REFUSE to pay PMI. It is a huge ripoff! I don’t have an 800+ credit score because I go around stiffing lenders. The only people that PMI protects is the lender…it doesn’t insure you for squat…it’s money down a dry hole. You might just as well set the cash on fire…(sorry…the computer got stuck on “RANT” for a second…)
If you must, IMO, you should use a 2nd. The interest is deductible, so take that into account, also.
I totally agree with Keith. PMI is THE biggest ripe-off of many that exist in real estate; it pay-out vs. premium is something like 1%. I’m sure at some point it had a purpose but that time is past. What is even worse about PMI is the day after your loan closes then the lender can make up whatever rules they want with respect to getting rid of PMI and many make you wait 2 years and/or have an LTV as low as 65%. Moreover, if you loan get sold, the new servicing agent can impose whatever new set of LTV guidelines they wish. I have gone thru this pain of getting rid of PMI twice and its truly a hassle.
Bottomline, avoid it like the plague and take a 2nd.
Yes your mortgage interest on a rental home is deductible. As for the PMI, i would definitly get the 80/20 or whatever. But being rental properties, you might want to take whatever is going to give you the biggest positive cash flow.
Thanks all - so it’s unanimous - don’t pay PMI!!! Understood!!!
Also thanks for the clarification on the deductibility of mortgage interest, even on a rental property. One additional question of a similar nature: what about the property taxes - are they also deductible as is the case with a primary residence?
I would challenge every new investor or investor-to-be to go to the IRS website and look at Form 1040, Schedule E…it lists everything that you can deduct for a standard rental property. IMO, you have to know for yourself!
I agree. I’ve learned alot about taxes from the info i received on this site. I then went to the IRS.GOV and pretty much read the whole site and did my own income taxes, which ive done the last few years using 1040EZ. But now i know the laws/rules and have a good understanding about taxes. Definitly check out the site. You’ll end up saving money if you do
I’m pretty sure PMI is not deductable on a primary residence, but if it’s an income property, and Schedule E wants to know your total income or loss from the property, then PMI would be in the insurance section as it would contribute to your income/loss on the property.
But as a general rule, because it’s a worthless expense, I don’t think you should bother with it, if you do the numbers I would think that a second mortgage would almost always be cheaper than paying PMI unless your credit is really bad or something.
PMI is tax deductible on rental properties.
On your primary residence PMI is not tax deductible. on rental property it is tas deductible. If you compare the cost and deduction to a second mortgage vs PMI, you will be able to determine which is better for you.
Can you deduct Private Mortgage Insurance (PMI) premiums on rental property? If so, which line item on Schedule E?
Yes. You can deduct Private Mortgage Insurance premium on line 9 of Form 1040, Schedule E (PDF), Supplemental Income and Loss. Write “PMI” on the dotted line.
References:
Publication 527, Residential Rental Property
Form 1040, Schedule E (PDF), Supplemental Income and Loss
Form 1040, Schedule E Instructions, Supplemental Income and Loss
One other thing to consider, If you are buying a personal residence. You also have the option for upfront PMI, this is a one time upfront cost and it is tax deductible in full.
Depending on the LTV this is usually much cheaper then monthly PMI or a 2nd mortgage, then add in the tax deduction and it could be the best way to go.
There is never one answer for every situation. You need to analyze the options and determine what works best on a case by case basis.