Investment Property

Investment Property questions and answers

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Q: investment property?
I really want to buy a rental investment (like duplex) and I need some guidance: 1. Should I form an LLC to protect my potential lawsuit and purchase that rental property under that LLC? can I avoid an LLC due to fees/costs? 2. I am in CA and looking out 3 different areas: Austin TX, Vegas NV, or Raleigh-Durham NC. Which one do you think I should look into in terms of long-term investment (at least 7 years) and taxes/fees consequences Thanks

A: I'm an agent out in Las Vegas, and boy is it a buyer's market! Sellers want to make "deals" happen, and they're willing to negotiate. Prices might not get any lower, and selection may never be better out here. It's also good for investors that rents are on the rise. The average rental out here is over $1200/mo. An example of a good situation is a rental condo I own purchased for a mere $75,000 in '06 and I'm renting it at $725. Other same-sized units in there are already going for $800/month! Feel free to try and contact me if you need any advice on the Greater Las Vegas-area market!

Q: We are buying an investment property. With little to put down, what is the best way to finance the property?
We have a large amount of equity in our current house. We have no bills other than the mortgage on our current house. Is a home equity loan to get to the 20% down payment and then a conventional loan on the investment property itself the best way to go? Or is it best to finance the investment property itself rather than using the equity in the primary residence. We could finance 100% of the loan purchase price or do a secondary mortgage to come up with a 20% down payment.

A: 80/20 loan - interest only on the investment property.

Q: Reinvesting the captial gains from an investment property into another property? How does that work?
Is it true that if you use the capital from the sale of an investment property and put that towards another property that you will not be taxed on the capital gains via tax? How does this work exactly? And can you use the capital gains toward any type of property such as a primary residence or a second home or does it have to be toward another investment property to avoid paying capital gains tax on those proceeds?

A: The 1031 (refers to Internal Revenue Code Section 1031 which explains the exchange) "like-kind" exchange has specific criteria to qualify as a nontaxable event. You must exchange for similiar BUSINESS USE property and you must use a qualified intermediary if you are buying/selling real estate that is not a "direct" exchange. The delayed, non-direct exchange is referred to as a "Starker" exchange. The qualified intermediary will handle all money - if any actually comes to you (or an account where you have access, etc) the exchange will not qualify. After selling the property you must identify replacement property within 45 days (EXACT property with legal description) and take posession of replacement property within 180 days. Hopefully this helps. The IRS website has a publication on like-kind exchanges which may help you. You can download here: http://www.irs.gov/publications/p544/ch01.html#d0e2447

Q: When realtor buy an investment property and put their realtor rebate back to the settlement, is it taxable?
I have two answer. 1) If put back to settlement, it is not taxable. It only reduce your purchase price, when you sell your investment property, you have to pay tax. You only need to pay tax if you get check directly from the builder. 2) Another group think 1) only apply to second home. For realtor buy investment property, even realtor put rebate back into settlement, they still have to claim it as income and pay tax on it. Which one is true, any website as support document? Thanks. If the law will be different from state to state? I am in Maryland.

A: There are two different taxes, income tax and capital gains tax. The Realtor pays income tax on sales commission, or any income he receives. Capital gains tax is due after the sale of the property if the property is sold at a profit. If a Realtor collects a sales commission, and applies his commission to the sale of a property he is buying, then he would owe income tax on that sales commission. It is income to him, and he is spending it to buy a house. It is taxable income whether he is buying investment property, or his personal residence, or a second home. If the Realtor receives a discount on the property he is buying, it is possible that the discount might be considered income to him. Since most Realtors are self employed, the discount of the sale price can be treated in different ways. The Realtor would need to explain why he is receiving the discount, especially if it is a discount that others would not normally receive. Cash rebates from a manufacturer (builder-developer) are not included in income: http://www.flpba.org/pdf/Tax%20Tips/What%20income%20is%20Taxable.pdf Generally, if someone receives property (or discounted price on property) instead of cash as payment for services, then the fair market value of the property should be included as income. The same is true of bartering. The fair market value is included in the Realtor's income, and he pays income tax on that amount. In figuring capital gains tax, after the sale of the property, the basis of the property would not include any discount to the property's sales price. However, if the Realtor applied his commission to the settlement, then it would be considered part of the price he paid for the property, and it would become part of his basis. It doesn't matter if this is investment property, or the Realtor's main home. The basis is figured the same way. When a Realtor, or anyone, sells a property they have lived in, it might be possible to exclude part of the gain from capital gains tax. If all or part of the gain can be excluded, then the capital gains tax that is due on the sale of the house would be less, or perhaps no tax at all. This information applies to Federal income tax. Visit the State of Maryland website to find any special rules Maryland has added to their tax code for their state income tax.. http://www.comp.state.md.us/

Q: How do I report interest in 2006 for an investment property sold in 2005?
Hi. I received a 1098 substitute form in the amount of $2000 for interest on an investment property loan. Funny thing is, I sold that property on Dec 30, 2005. So for my 2005 tax return, I submitted a form 4797 for the sale of the property. So maybe the loan wasn't paid off right away and interest accumulated in 2006. The 2006 interest must have been paid from the closing costs… after the closing on Dec 30, I did not personally pay for any additional expenses on the property. So how do I report what would normally be a business expense of $2000 for a property that I never owned in 2006? Or maybe I should not include the 1098 in my 2006 return since I did not pay anything on that loan in 2006??? Thanks for any good advice.

A: If you get taxes prepared by someone, just tell them about it. Then you have nothing left uncovered.

Q: Tax implications of Investment Property Income to a minor?
My husband and I just bought an investment property that we intend to rent. We purchased the property for a 10 year old minor with the intention of us making the monthly mortgage payments and the child receiving the monthly rental income (approx. 12K annually) to put in a savings account. Will our 10 year old have to file taxes on this income?

A: yes and you will lose your ability to deduct or claim his as a dependant. I advise seeing a tax accountant before you go any further.

Q: How to form a compny for an investment property ?
I am planning to buy an investment property. All my instincts say that it would be wise to form a compny for that. I am pre approved for a mortage but I have no clue how it works. My question is Mortgage company approved me not the new company that I am planning to form, which I will use to buy the property. How does this technically work can someone help me please ?

A: Even if you form a company, you will have to use your personal credit until you company is established. Getting a DUNS number will assist in that task. But you must consider if you are going to be a LLC, or and S-Corp, and if someone is going to be a partner, or your business is sole proprietorship. For purposes of protecting your personal assets, you would want to be and S-Corp, however the cost to do this may be restrictive for you. The cost varies from state to state, in my state, Illinois, it cost almost $500. You need to consider having a good accountant and attorney as well. Learn how to evict because it will happen. Know your state laws about tenant rights, which vary from state to state. A great website to get lot of free help on land-lording is Mrlandlord.com.

Q: i want to buy an investment property on the gold coast, Australia. How much will i need to start?
Ok so im currently studying and am wanting to buy an investment property with my brother in about a year, so i can save. Im just wondering how you go about it and how much you need to start? I will either move to the gold coast in 2008 or 2009 so i will want to live in it and also rent it out when we purchase it. I still currently live at home and i have around $7000 in my bank at the moment. What do i need to know about investing in property? What are the pros cons. Is it a good idea to invest in the first house i buy after leaving home?

A: The previous answer is a scam. I live close to the Gold Coast (an hour away). For a new two bedroom apartment with small water views, prices are about AUD$500,000. For AUD$500,000, you could also get a 3 bedroom house about 3 kilometres from the beach, with no views. You'd struggle to get anything good on the coast for less than AUD$400,000, unless you are willing to buy older (15yrs+) places. Be warned though: the Gold Coast property market is highly cyclical. Prices can go down as well as up. You will get ripped off unless you actually go there, and look around with a few different real estate agents.

Q: What should I look for in an investment property?
So that it can be positively geared? How do I determine if a property will make a good investment? Is there a checklist someone can reccommend?

A: location, location, location what are some nearby businesses or neighborhoods what are the future expansion ideas for the town is there significant debris or overgrowth creating problems if it has a structure what is it's general condition how long can you stay invested w/o starting to see revenue

Q: How do I purchase an investment property. Living at home so living costs are low?
I really want to enter the property market but i'm not sure on the safest way to do so. I'm living with my parents and only have to pay a small amount of board each month so all funds can go towards the payments on my investment property. Please offer suggestions and tips, thankyou

A: not only do i do internet marketing but i flip homes as well. purchasing an investment property is not just being able to pay payments. you need to get pre-approved for a loan from the bank and sometimes you will need to put a percentage of the purchase price down as a down payment and that ranges anywhere from 3-6% of the purchase price. Closing costs are something you may have to pay too that is if the sellers will not pay them or will only pay a portion. You will have to get an inspection done it is optional but recommended on a flip. You have to determine how much equity you can build in the property if you decide to purchase and how much it is going to cost to get that equity. when finding a property you should look at major things that determine the value like does it have a brick foundation(stay away from slab homes), how old is the roof, how old is the a/c unit, what kind of windows does it have, how old are the appliances, is the home gas and electric or all electric, is the lot level, is the property near shopping,schools,etc... these are major questions when finding a flip. Also keep in mind that now is the time to buy not to sell because of the market, it is good in some places but for the most part it isnt great. For example my last flip was bought at 99,500 and 8,000 invested it then appraised for 131,000. sounds great huh? well after sitting on the market for 7 months and dropping the price 3 times i finally had to accept 113,500 because the payment was eating into my profits. I guess basically what I'm trying to say is DO your homework because it is not easy, especially if you arent planning on doing alot of the work yourself. I highly recommend going in to your first flip with at least 8,000-10,0000 play money. Keep this in mind as well- when you think you found a house remember that in order to sell it you have to pay commission to the realtors. I cannot even begin to tell you everything here so if you have more detailed questions please email me at home_biz_king@yahoo.com . good luck and if you want to make more money at home while your waiting on that flip then go to www.homebizjumpstart.com

Q: What is the effects of letting an investment property go into foreclosure?
I have been trying to find out what happens when letting an investment property go. Is it the same as a normal foreclosure or short sale, where you get taxed on the difference? Or is there some other route this takes. Just a question not my situation!

A: I do not think you will be taxed for the diference. When a forclosure property is sold a your local courthouse. It is sold by the lender with a substitute trustees deed. That means that it is not you that is selling it it is the lender. The lender would be responsible for any tax liabilities as far as a shortage or overage on the sell of the property. The onlly thing you will suffer is a big blemish on your credit.

Q: How do you buy investment property with a home equity loan?
My husband and I are thinking of purchasing an investment property by way of using a home equity loan on our first home. Is this a smart thing to do? what are the down sides of it? We don't have money of our own in the bank to do it, but it seems like a good time to take advantage of the changing real estate market.

A: Forget taking such a risk. Untill you have a nice 6 months emergency fund don't go messing with your home security. Good luck but don't let the vision of having "investment" property make you do something foolish. IF you did have some money in the bank and experience my answer MIGHT be different.

Q: When do you start thinking about an investment property?
What rules of thumb are there for knowing when you're in a position to start thinking about getting an investment property? eg Is there a certain amount of equity you 'should' have in the family home before branching out? If you have an investment property, when and how did you do it?

A: I Found an article today about investment property, maybe it could be useful http://4business-finance.blogspot.com/2008/12/buying-investment-property.html Good Luck

Q: What are the downpayment guidelines when buying a multi-unit investment property?
Is it different from a primary home? I am interested in an apartment building to purchase as an investment. What are the guidelines for downpayments on an investment property. Is it the same as a primary home? I have heard that it is not the 10-20% minimal downpayment because if all/most of your units are occupied, this is taken into consideration. Websites are appreciated too. Thanks for your help.

A: It'd depend on how much the bank was afraid they'd end up owning it. 20% might do, in good times. If you have good assetts or cash flow to assure them, it'd help. Try looking at loopnet,com - It's a commercial real estate web site, well organised for searching. You could get some idea of what terms are being offered "by owner". There are some areas where a bank would practically give you a small apartment building- Detroit, for example. If you know what else is available, it'll help negotiating with the seller - talk about the other places you are looking at, and excellent terms available. Never act like you want to buy what they're selling. More like " well, this might do, if it's a real good deal"

Q: How do you buy an investment property with an LLC?
I purchased a investment property then formed an LLC. I was then warned that if I transferred ownership that I would end up causing myself a lot of problems with the mortgage company. I am about to buy a second investment property and want to do it right this time. Do I obtain the loan in the name of the company?

A: Yes. You get the loan in the name of the LLC. You and the LLC are two different "people". The problem is the LLC probably doesn't have any credit. You might have difficulties because of the lack of credit, assets and income of the LLC.