Former lurker now needing advice - Posted by James C.

Posted by Scott on May 04, 2000 at 13:22:35:

Just curious. If you aren’t filing jointly there is a much greater benefit. It doesn’t take a very large loan to justify itemizing, especially when you figure in your property taxes.
From a tax standpoint of course, a rental property presents itself with significant benefits. I own property in another state (just happens to be where most of my family lives) and having it allows me a deduction for several of my trips to see my family. Not to mention the depreciation. So I do believe that everyone has to take into account their own personal tax situation and make sure they plan accordingly to maximize whatever deductions they are entitled to.

Former lurker now needing advice - Posted by James C.

Posted by James C. on May 03, 2000 at 20:54:58:

I’ve been a lurker on this site for maybe a year, and valuing the opinions of many active participants, I would like some advice on my situation.
The property in question is a 2 BR rental I own. PITI is $312 and it rents for $525. FMV is $50,000.
Can anyone tell me if a lease option would work, and if so, give a ballpark list of numbers(option fee, rental credit, etc.)? I fear I can’t do much better than the current cashflow,and therefore need some more heads to think on this.
For my part, I am contacting the SeniorCare center a door down, to see if they may have any use for the place, thus saving myself some of the tenant headaches, and hopefully getting a better rent. (My current tenant is moving out this week.)

Thanks, James C.

What is your goal - Posted by Bud Branstetter

Posted by Bud Branstetter on May 04, 2000 at 11:32:55:

When you mention L/O you seem to say you’re willing to sell. One approach to increase cash flow is to shorten the term. An amortization of 15 years gives a payment of about 15% more than the 30 year loan. One junker I bought for 9K and sold for 15K at 300/mo for 60 mo. at 10% interest. You can calculate the return. I am not saying you can get $1000 payment for this house but someone may be able to pay more than the 1% of value. If the goal is not to sell then the proper screening of the tenant/buyer may yield someone that is willing to put up 2K as option consideration but unlikely to control their finances and be able to refi. The other edge of that sword is they may also default in payments and cost you to get them out.

Another method of owner financing on B/C buyers is to raise the interest rate annually until they refi and pay you off or need to sell because the payment is too high. You need a good down payment to be safe.

I have used credits such as $100/mo credit off the price for each $50 of monthly rent. Of, course my price would be $51,900 or more.

The way to save tenant headaches is to not be a landlord. Screening helps if you want to be a landlord. In reality the low end houses will be more trouble because of the clientele. A 2 bedroom house is not the long term rental you want to keep. What could you do with the cash if sold retail? 1031 into a 100K house that may be a keeper?

Re: Former lurker now needing advice - Posted by Laure

Posted by Laure on May 04, 2000 at 08:28:48:

I’d do a Lease Option with the next Tenant. I do it all the time with deals just like yours. Advertise Rent to Own. 3k down. Make the rent 550/month and give them 25.00 per month rent credit IF their rent is paid on the FIRST. You can give them 50 credit, if you like, I usually do. Also, credit and option money are only applied to the actual purchase of the property and not refundable. I use Bronchick’s L/O Contract. It’s well worth the money for the course just for the contract. It states that Tenant is responsible for all repairs, and if I really don’t want to sell, I write the lease for 2 or 3 years. I think leases longer than that will be concidered a contract sale, so it’s not recommended. I believe the statistics on Tenants exercising their option is down around 30%, so you will probably get the house back at the end of your term. But there is the opportunity to get more option money.

I have a house I bought last summer. Payment is 500/mo PITI. I wrote a L/O with Tenant. Option money was 2500.00 with 595/ month for a year. She walked after 7 months. She put up a new privacy fence too ! I just found a new Tenant Buyer who put 5k down with payments of 595/ month. Option expires in a year, so he has to buy within 12 months. Now you find something wrong with that deal !!

Laure :slight_smile:

Re: Jim Piper – does this make any sense at all?? - Posted by Bill Gatten

Posted by Bill Gatten on May 03, 2000 at 21:30:49:

Hi James,

A question:

What would happen if your renter at $525 were given the income tax write off for your mortgage payment and property taxes? Wouldn’t they be willing to give you another $100 per-month or so? I’m thinking the After-Tax cost of renting for $525, just HAS TO BE higher than the After-Tax cost of “buying” for $625.00(??)

In addition, what if you gave your tenant a percentage of the future appreciation, half, say, of the equity build-up in the mortgage loan, and the “pride of ownership” along th way in exchange for handling all the mainteancne, management and repair costs for you?

(Jim Piper…does this make any sense at all?)

Bill Gatten

Thanks, but one more question… - Posted by James C.

Posted by James C. on May 04, 2000 at 08:40:16:

or maybe two. If the FMV today is $50,000 at what price should I set it when the option expires in 2-3 years? I should adjust upwards for both appreciation and risk, right?

Thanks again, James C.

Re: Jim Piper – does this make any sense at all?? - Posted by JPiper

Posted by JPiper on May 03, 2000 at 23:45:59:

Hi Bill:

If I’m not mistaken, the standard deduction for a joint return is $7200 at present. What this means is that if the tenant was given (sold) the tax writeoff of $600 per month, he would then have to itemize to take this deduction, thereby losing the standard deduction of $7200. In other words, there is no advantage to someone at this level…unless there are other significant writeoffs that could be added to the $600 writeoff.

Giving half the equity build-up to the tenant might be an advantage to him…I’m not sure it would be to you.

In general, I think this would be a tough sell at this particular payment level…assuming that the tenant understands the ramifications of his decisions. They don’t necessarily, people buy houses at this payment level all the time thinking they will get a tax advantage…which they don’t.


Re: Thanks, but one more question… - Posted by Laure

Posted by Laure on May 05, 2000 at 05:35:37:

YES ! And the answer is… AS MUCH AS YOU CAN GET !
In the end, the appraiser will confirm or deny your sales price when the Tenant Buyer exercises the sale. I don’t gouge the people, but I want to protect myself. An easy rule of thumb is 3-5% for each year of the option. That is what my market is going up every year. Usually buyers want to know what their bank payment will be on the purchase price when they exercise their option. Mine are always lower than the rent payments. I have one where my rent is the same as the new mortgage will be, and the buyer isn’t going to exercise until the last minute since he won’t save any money. Kinda backfired on me, but his option is up next February, and it was my very first L/O, so live and learn.

Laure :wink:

Re: Jim Piper – I Got it…Thanks! - Posted by Bill Gatten

Posted by Bill Gatten on May 04, 2000 at 13:36:56:


Thanks so much.

The reason I called you out on this one is because you and I got into this issue about a year ago, and I must confess: I really didn’t get the picture as clearly then as now (a little Cognitive Rigidity there). Nevertheless, I do now see exactly what you mean, and it makes all the sense in the world. Dealing in mostly $100K to upper end properties, I don’t run into this much from here (though we’ve done a few lower-end properties in the Midwest and in Florida, Virginia and Texas lately).

I think in these cases (low-end properties), the marketing of the benefits of owning must be tied solely to Appreciation, Equity Build-Up (from principal reduction), Pride of Ownership, merchantability, etc… Although “control” of the tax benefits is certainly a powerful selling point as well (“Mr. client, you have the full tax benefits at your disposal, their use being dependent, of course, upon your tax bracket and how you handle your deductions”).

However, Jim, from our standpoint (that of Investors) the functionality the a 3rd party trustee, co-bene title-holding land trust (can’t say “PACTrust”) STILL–none-the-less–provides the best protections and freedom from risk and ordinary investing concerns (distance from the DOS, ease of dispossession; freedom from the untoward or unforeseen negative actions of the respective parties; asset protection and shielding, etc.)…wouldn’t you agree?

Bill Gatten

Re: Jim Piper – does this make any sense at all?? - Posted by Rob FL

Posted by Rob FL on May 04, 2000 at 08:54:55:

I agree with you. I helped my in-laws buy a condo for basically no money down. 1st and 2nd mortgage. It is held in a trust with them receiving all the tax write-offs since they live in it. The interest on the mortgages is about $200 a month ($2400 a year) and the property tax is about $400 a year. Since the standard dedcution is $6-7000, they don’t itemize so the deduction is lost. And I can’t take the deduction because the total payment (if we treated it as a rental property – them renting from me) would force me into a profit situation and I would have to pay taxes on it.

From what I have seen, tax write-offs are a dead issue for most inexpensive properties.

People buy houses at this payment level all the time thinking they will get a tax advantage? - Posted by PatrickMD

Posted by PatrickMD on May 04, 2000 at 08:54:44:

Jim, in reference to your statement, “They don’t necessarily, people buy houses at this payment level all the time thinking they will get a tax advantage…which they don’t.” Is it because they’re buying a house at a low price level that they won’t receive a tax advantage? If so, is there a ball park threshhold that the tax benefit generally kicks in? Thanks. Pat.

Re: People buy houses at this payment level all the time thinking they will get a tax advantage? - Posted by JPiper

Posted by JPiper on May 04, 2000 at 10:29:42:

When you have interest and taxes on a primary residence (or in the case of a PacTrust the writeoff of rent), you are presented with a choice. To write off interest you have to itemize. If you don’t itemize you are able to take the standard deduction.

Currently the standard deduction on a joint return is $7200 per year. Therefore, there’s no benefit to itemizing if the interest and taxes to be written off do NOT exceed $7200 (assuming there are no other or few other deductions available).

In other words, there is no benefit to the writeoff associated with a house on a personal return if it does not exceed $7200. If we assume taxes of $600 per year, that means that interest would have to exceed $6600 or $550 per month. That means that loans under let’s say $75K at an interest rate of 8.5% do not provide a tax writeoff that exceeds the standard deduction.

Obviously, there are other reasons that people buy houses other than just the tax deduction…and then again, some people don’t understand how their taxes work and just ASSUME they will get a tax benefit because that’s what they’ve been told.

In my area, most mortgage payments will be less than rent…so with or without tax benefit there is still a reason to buy just from a numbers standpoint.