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You should be talking to a kick butt lender because the lending market is changing every single day. You are right, though - there are some properties out there where the numbers actually pencil in! I just found one in Ballard for well under $200k and there are a few more as well. The REO properties are popping up here and there and are in pretty good condition in some cases.
Let me know if you need a lender - or just want to pick my brain! :)
This is not legal or tax advice. Seek appropriate legal and tax counsel.
Most lenders will require that you put up a 25% down payment on non owner occupied real property assets. Personally, I am not a fan of using equity in a primary residence to acquire real property asset investments. That idea got many people into financial trouble. I am seeing many of those in foreclosure or short sale. Under most circumstances those in trouble thought of the cash from equity as cash. It is in fact leveraged and the income from the real property asset rental must be able to cover the annual debt service from all sources including the indebtedness secured by the subject real property asset and the indebtedness from the primary residence equity.
I would suggest you use unleveraged cash as the down payment to acquire more real property assets. Bank financing will be better than hard money lending. Hard money lending note rates can be 10%-20% with loan fees of 3%-5%. If you are looking for a lender, then choose wisely. They come in all shapes and flavors. You need one that understands more than the marketing fluff in the loan brochure. Choose one that understands margins, indexes, inverted yield curves, bond market pricing, and economics.
If you are going to use equity from a primary residence which I am against, then you should maintain 25% equity position at a minimum.
âincome is about double the mortgageâThe rental income needs to cover more than the mortgage. Property taxes, utilities, reserve for future capital improvements, repair and maintenance, property management. If you are not using a professional property manager, then you need to account for paying yourself the property management fee.
âup and running with at least a small profitâCash flow is much more important than profit. Ideally, real property asset rental transactions should be structured to have a tax loss and positive cash flow. Structuring the transaction can be complex at times.
Flipping vs holdingThere is a big difference between the two that can have a significant impact on the assets cash flow. Flipped real property asset income is usually taxed at the earned income rate and does not qualify for capital gains treatment. Real property assets held for investment usually qualify for capita gains treatment upon disposition of the asset. Generally, the assets needs to be held for at least one year to qualify for capital gains treatment.
If you are not a professional contractor paying yourself for the work, then you need to account for the opportunity cost of your time. For example, if your normal job pays you $65 an hour after tax, then your opportunity of your time spent fixing your rental instead of working your normal job is $65. the calculation can have a significant economic impact.The economic reports I am reading seem to suggest that the bottom wonât hit until the last quarter of 2009 or the first quarter of 2010. If you are holding on to the real property asset rentals for 5-7 years, then I would be less concerned about the timing of the bottom of the market. Timing is very difficult. The type of market is identified by looking at the two previous quarters similar to identifying a recession. Once we have identified the type it already happened.Contrary to popular belief location is not the most important factor and timing is less important than some would lead you to believe. The location can be great and still produce lower than optimal return on capital. The location and be poor and produce higher than expected return on capital. Many economic factors will influence the location. Timing is a real estate market is difficult. Once the type of market has been identified it already happened. We know the bottom by looking back two previous quarters. We know the market is getting better by looking back two previous quarters. If you are acquiring real property assts on a steady basis and holding them for quite a while then timing is less important. Calculating the expected return on capital is important.
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