I'm also currently researching investing in rentals. My question is whether now is the right time to start my first investment, or whether I should wait and see if the market collapses again in a year like people are predicting? I'm looking to invest in Austin.

Champ Bailey said:

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I'm also currently researching investing in rentals. My question is whether now is the right time to start my first investment, or whether I should wait and see if the market collapses again in a year like people are predicting? I'm looking to invest in Austin.

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Wait for a hurricane to level an area and come in and buy on the cheap. Might not have to wait long.

Abitaholic said:

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Here's some personal info to your question. I was in the same boat - wanted somewhere to park a bit of cash outside of the market.

I bought a 3BR/3BA townhouse in CS this past spring at The Barracks. I put 20% down and my monthly mortgage is right at $1,100; including taxes, insurance. Each tenant pays $550 so I make roughly $550 per month. At some point I'll have maintenance to do so that will hit me but this is better cash flow than I initially expected. I manage it myself.

I'm hopeful I'll also get a tax benefit from the rental property taxes and interest, but I'm not sure exactly how that will play out.

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and you depreciate the home that will wipe out almost all your profit...sweet. Cash flow, no taxable income. That will occur when you sell the house as you NBV will continue to go down as you depreciate the home. Not too shabby. Well done.

I need to do some of that. Not finding what I want here in Dallas at the moment with home prices continuing to escalate.

The Wonderer said:

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wcb said:

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Abitaholic said:

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Here's some personal info to your question. I was in the same boat - wanted somewhere to park a bit of cash outside of the market.

I bought a 3BR/3BA townhouse in CS this past spring at The Barracks. I put 20% down and my monthly mortgage is right at $1,100; including taxes, insurance. Each tenant pays $550 so I make roughly $550 per month. At some point I'll have maintenance to do so that will hit me but this is better cash flow than I initially expected. I manage it myself.

I'm hopeful I'll also get a tax benefit from the rental property taxes and interest, but I'm not sure exactly how that will play out.

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So that means you're paying $1100 / month + being taxed on $1650 income per month. At ~20% that's ~$330 of your $550 profit gone to taxes. Granted you have a few deductions but not enough for me to give it a go.

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Where do you get taxed on revenue and not profit for businesses??

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From the IRS

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You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property. You must report rental income for all your properties.

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Seems pretty black and white to me. But maybe I'm just clueless here.

Right, when you record your income, you record it as gross. That's only one part of the total equation though.

GreasenUSA said:

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Right, when you record your income, you record it as gross. That's only one part of the total equation though.

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Sure, I get that. From the same site...

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If you receive rental income from the rental of a dwelling unit, there are certain rental expenses you may deduct on your tax return. These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.

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The thing I expected to see there back when I first started looking into all of this was mortgage, the primary "expense" for the average Joe. Depreciation was the one thing I was unaware of that seems like it could be a major deduction. Beyond that the rest of the expenses seem like they would be minimal in the big picture.

I'm simply pointing out that my original assumption in real estate was that you would be taxed on the net (of rental income minus the mortgage) which turns out not to be the case.

Depreciation is a huge write off. As is the mortgage interest and taxes. 60-70% of the mortgage payment will be interest and taxes.

If you're carrying a mortgage on your property it's pretty hard to make the numbers work in CS right now. I'm a home builder here and we looked at partnering with a couple of guys to build and operate properties but even given the cost savings of building it ourselves the numbers just aren't very good.

A nice rule of thumb is whether or not you can lease the property for more than 1% of the value of the property per month. So if you pay $400K for that property can you lease it for $4000? One of the guys in my group took his cash and bought a couple of properties in Tomball where he's getting close to 1.2%. Here? We were looking at .9% as good and some are leasing as low as .67%. We concluded it's got to be a cash market here right now.

Whomever said there are a lot of for lease signs around town is right. My son and his buddies found a 3/3 duplex off of SW Pkwy for $900 at the beginning of August. That's way too late to be signing a lease if you're the owner. Leasing for next fall starts in October so if you're this August getting that property leased you've likely already cut rent at least once just to drum up attention.

Champ Bailey said:

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I'm also currently researching investing in rentals. My question is whether now is the right time to start my first investment, or whether I should wait and see if the market collapses again in a year like people are predicting? I'm looking to invest in Austin.

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I have 9(& 1/2 technically) and am waiting...patiently...

Question regarding the most advantageous tax strategy for my situation...

I currently co-own a house with my mother. She makes all the payments but is now on fixed income (social security) so she received zero of the tax advantages last year. I have been entertaining the idea of refinancing the property solely into my name then renting back to her in order for me to receive the tax advantages. Plus we could shave 2 years off the mortgage terms with no money out of pocket.

For those who don't know, there is a grey area in me claiming the tax deductions on a properly I co-own but do not live in or pay. With refinancing, I could "rent" the property to my mom and everything would be on the up and up.

But I am unsure if it makes sense to classify the income/property as a rental or just to treat it as a second residence. Any input or resources to help crunch those numbers?

Financing isn't the issue, it's the ownership of the property. Your mother would have to sell/gift her share of the property to you, which would mean new financing but the title would need to read in your name only.

Then, you would need to make sure you have contracts and agreements in place and the pricing of the rent would need to be at market value.

Here is the IRS article with the beginnings of your answers. Tread very carefully as it can be very penalizing to get this one incorrect. In fact, I would consult a tax professional before you act on anything.

https://www.irs.gov/taxtopics/tc415.html

I appreciate the info. I have read that publication and others, I feel pretty clear on what's needed from a legal perspective, which is why I would have it refinanced to put the title solely in my name.

My question is more about which way is best to treat it from a tax filing perspective: secondary residence or rental property.

If you can get it to qualify for rental status, you will have many more deductions available to you than with a residence.

And this is nitpicking but this isn't a refinance that you would be doing, it's literally a sale/transfer of ownership. Maybe you're just interchanging the terms but they are different events.

Second homes have to meet certain requirements to be eligible for the more favorable financing. That typical means it makes common sense as a second/vacation home. It would either need to be in a resort/vacation or in a place that would make sense for you. For example, if you have season tickets and live in Dallas, a second home in BCS might make sense. But, if you primary is in Bryan, you will not be able to call your college Station home a second home. It has to pass the small test.

Thanks all. I appreciate the feedback. Sounds like classifying it as a rental is my best/only option. I'll try to find a CPA to talk through the specifics to stay above board with the IRS.

For clarification, it will be an actual refinance. It is currently a 30 year FHA loan at 5% with 22 years remaining. I am looking at refinancing to a 20 year conventional at 3.5%.

D said:

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For clarification, it will be an actual refinance. It is currently a 30 year FHA loan at 5% with 22 years remaining. I am looking at refinancing to a 20 year conventional at 3.5%.

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So you don't co-own the property with your mother who you intend to rent it to?

I do. Both our names are on the current loan. The refinance will be solely in mine.

Then I assume that means her name is on the deed of the property? Are you also counting on the "refinance" removing her name from the deed as well?

Thinking about it more...maybe you own the property but had a mom as a co-signer...but that doesn't sound right given the financials circumstances.

Thanks for bringing the title / deed up. I am going over there tomorrow to take a look at the documents.

You are correct - I was the co-signer to her loan. It is likely her name is on the deed.

So then you also need a transfer of ownership to you since you can't rent your mom a property she owns. Assuming your mom will be giving it to you and you aren't buying it from her for Fair Market Value there are tax implications...either you'll probably need to file a gift tax return (Form 709) or you'll have an extremely reduced basis which will come to bear when you sell.. You shouldn't pay any gift tax but the return is necessary to preserve the original basis in the house (so you don't get taxed on the entirety of the sale whenever you sell it) but it will also reduce the lifetime exclusion and should your mom hit the powerball or have significant savings tucked away, could effect taxation of her estate whenever that time comes.

Secondly, if you aren't an owner of the house, you probably can't get financing on it (totally guessing here) so even if you don't want to go the rental route, I doubt you'll be able to refinance on your own.

Finally, I don't think you can actually claim the mortgage interest if you have no ownership in the house. So if you've been claiming it to this point, you're free to continue but should you get audited, it will come back as taxes to pay + interest.

Confused yet? TL;DR - Go see a tax pro. There are many on this board who could help out. I'd recommend Puma if you're in the Houston area.

Very much appreciate the comments.

All good things to consider. I will confirm tomorrow about whose name is on the deed. It's been 8+ years since we purchased the house and I can't remember.

It seems like "gifting" is the way to go. Not much in terms of her estate or savings (fortunately/unfortunately). Power Ball chances are slim. Ha.

Unsure if it just hasn't come up yet, but no lender has balked a refinancing into just my name. But I haven't gone through the full underwriting process yet.

I have not been claiming the tax deductions on the property. That was actually the genesis of this whole adventure. She was laid off in 2015 and hasn't been able to find a permanent job since so we set her up on Social Security. She had zero taxable income for 2016 and thus did not receive any of the tax advantages of owning a home, I started researching the ability for me to claim the deduction since the loan is in both our names.

Just claiming it while not occupying it is a grey area with the IRS at best so started looking into refinancing into solely my name and renting back to her. And frankly, there will come a point where she will be unable to live in the house alone so it seemed worth it to go ahead and refinance while rates are still low.

I knew there were tax implications and strategies that would need to play out but it is a little more complicated than I initially thought.

I will start with confirming the title then go from there. Again, I appreciate all of your input. It's been very helpful.

I reached out to a CPA I have discussed the scenario with earlier this year but they are not local. I am located in DFW if you have any recommendations.

The Deed of Trust has both of our names on it. Does that simplify the refinance process or will it still need to be transferred?

If you want to pursue the rental avenue, it will still need to be transferred. You can't rent someone a property they own.

Makes sense. Working on connecting with a CPA. Thanks for your input.

Jay@AgsReward.com said:

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Second homes have to meet certain requirements to be eligible for the more favorable financing. That typical means it makes common sense as a second/vacation home. It would either need to be in a resort/vacation or in a place that would make sense for you. For example, if you have season tickets and live in Dallas, a second home in BCS might make sense. But, if you primary is in Bryan, you will not be able to call your college Station home a second home. It has to pass the small test.

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What if you're looking to finance either a second home or a rental property but you've fully paid off your mortgage on the house you live in?

Do all the second home or rental provisions still apply in lending or is it treated like the first mortgage?