Posted by Carl CA on October 12, 2004 at 17:28:36:
Brian,
Forget about trying to save closing costs. Why in the world would you want to buy negative cash flow? You’ve also left out other expenses you’ll likely incur (vacancy and maint.), making your annual negative cash flow even larger. As it stands, you’ll likely lose thousands per year on these condos. How do you intend to make money on this?
Carl
EXPERIENCED only: Evaluate this financing plan - Posted by Brian
Posted by Brian on October 12, 2004 at 15:59:11:
Hello,
I am ready to purchase two condos at 65K each. They are currently rented to good tenants who wish to stay. These condos are only 3 blocks from the lake in a major redevelopment zone. Evetually, I would rent them as week-to-week vacation rentals, not as perm. residences. Or, I am also toying with the idea of knocking down the wall in between the two, remodeling a bit, and selling it as one luxury condo. Yes, it is allowed per condo regs. But I wouldn’t look to do this until the area developed more (two-three years?).
Anyway:
EXPENSES: 250/mth taxes/ins. + 360/mth assess. = 610/month
INCOME: 1290/month
CASHFLOW: 680/month
Now, I was going to do this deal as a cash buy, doing a refinance on my 2-flat. This would increase my payment by about $840 on the 2-flat. So my cashflow only covers most of my increased payment, not all.
The reason I wanted to do it this way was to eliminate paperwork (i.e. keeping track of more mortgages) and paying the add’l closing costs on the condos. Is this a bad move? Suggestions would be appreciated.
Re: EXPERIENCED only: Evaluate this financing plan - Posted by Dave T
Posted by Dave T on October 16, 2004 at 10:34:59:
The others have commented on the net negative cash flow for your financing strategy.
In actuality, at $680 per month, you have a strong positive cash flow on your business property. Refinancing your primary residence to make a cash purchase only gives you a mortgage interest deduction on your Schedule A, AND only for the first $100K of the cash you take out. If you cash out for more than $100K, you can not take a home mortgage interest deduction for the interest on the excess loan amount.
Now, the IRS will treat your weekly rental plan is an active income business, similar to operating a hotel. Your income and expenses are reported on Schedule C and your net income is taxed at your ordinary income tax rate and is also subject to self-employment income taxes. Because the property will be business use, I suspect that your depreciation schedule will use the 39 year recovery period.
Now, after you calculate the after tax implications of your strategy, how much will your discretionary income go down if you do this deal the way you have outlined it? Quite a lot, I would guess.
Just more input for your investment analysis.
Re: EXPERIENCED only: Evaluate this financing plan - Posted by jason
Posted by jason on October 12, 2004 at 20:34:11:
Have you looked into power option arms you can make minimum monthy paymets and possbly make a cash flow instead of giong neg.