Good credit, bad debt-to-income - Posted by B. Whittaker

Posted by steve on April 06, 2006 at 19:22:01:

I am selling my home of 10 years and will receive 288K I bought for 86K and have been told that me as a single man have a 250K exemtion.since i paid 86K i will not pay any capitol gains.Is this correct? thanks Steven

Good credit, bad debt-to-income - Posted by B. Whittaker

Posted by B. Whittaker on March 14, 2006 at 19:35:37:


I’m always looking for financing. I am a renovation specialist. After a manufacturing business that a partner spent into the ground, I have about 90% debt-to-income to get out from under. I have always managed to maintain credit in the 700’s but lenders won’t work with me because of the high debt and no W-2 job.

Any ideas on lenders who look at credit & the deal and not debt or income, would be much appreciated.

Thanks, B. Whittaker

Re: Good credit, bad debt-to-income - Posted by Walt

Posted by Walt on March 15, 2006 at 16:24:29:

Any broker can get you a No Ratio loan with a 700+ score. I do it all the time for my inveator clients.


Re: Good credit, bad debt-to-income - Posted by John Corey

Posted by John Corey on March 15, 2006 at 02:08:54:

For the most part just assume you can not get financing in the same way that someone who has a bad credit score.

Buying subject-to, on a lease/option, using hard money, with a cash partner who funds the deals and other such things are all ways to get past the problem.

Unlike someone with bad credit you can fix your problem much quicker. Each deal you do that produces a profit will move you closer. I would keep the cash while maintaining the payment as current. You can eventually use your own cash to buy properties. When you get to the point that you can wipe out the debt you can do so in a lump sum. The idea is to get positive points for making the payments while using the cash to do more deals. If you are doing the right deals the return on the cash will greatly exceed the interest rate on the loan in almost all cases.

John Corey

PS. There is a light at the end of the tunnel. Just accept that your starting point is your starting point and get to work. You need to be doing great deals. You should be doing great deals anyway.

Re: Good credit, bad debt-to-income - Posted by B. Whittaker

Posted by B. Whittaker on March 15, 2006 at 09:54:42:

Thanks so much! The great deals are much harder to find nowadays, seems like everyone jumped into the same boat. In my state (Az.), the market is inflated & deals are gone before they’re available. People that need to sell can sell for over market value to anyone in a day. It’s just a lot harder right now, in a white hot market where the lowest prices are in the $200K’s & it’s a feeding frenzy on top of it. However, higher end fixers may begin to become available for someone who can pay higher prices. Properties in the $200K - $500K that are fixers, don’t get as much attention.

One issue I’m contemplating on these fix & flips is the tax. Capital gains tax really takes a bite. Taxes decrease if you hold the property for at least one year. If I can do, say, 6 per year, what do you think about 1031 exchanges, one after another, then pull out cash on a refi once the equity is there in a property down the road. I can pay off the debt with that, & keep going on 1031’s.

Seems like a plan.

B. Whittaker

Re: Good credit, bad debt-to-income - Posted by Mauricio

Posted by Mauricio on March 24, 2006 at 01:42:04:

No. its not hot anymore. I had a house in Ahwatukee sitting on the market for 5 months. I finally had to rent it out.

If your looking for a deal send me an email.

As to your tax question - Posted by John Corey

Posted by John Corey on March 15, 2006 at 10:16:44:


  1. Capital gains tax kicks in after a holding period of 1 year. It is called ordinary income prior to the 1 year.

  2. 1031 tax deferred exchanges are for property that are held as an investment.

  3. Buying, fixing and selling does not fit the investment property label. The property is more like inventory rather than property that you held as an investment. Hence the 1031 section of the tax code can not be used for rehab projects that you do not hold for 1 or more years as a rental after you finish the fix up.

If you do too many deals in a year (IRS gets to pick what that means and there is no specific number that will be used) they you are classified as a dealer for tax purposes. The sale of the property will trigger taxes in the year of the sale on the full value of the sale.

Now, if you want to buy, fix and then sell consider if you should be using a C corp or other structure. If the tax will be applied as if the profits are ordinary income you might get a lower rate with a corporate tax rate while having more expenses or benefits being paid before tax. You could set up a medical plan, have company owned equipments, and other expenses that a company can deduct but which you could not take as an individual. This also includes the ability for the company to pay into a pension plan at levels that might be higher than an individual could pay in at.

There are liability issues that the company can help with. Head over to the legal forum for some advice and look in the bookstore for William Bronchick’s into book on the topic. I can find my copy if you need a specific title.

Coming back to the basics though. If you found yourself in a high paying job that you enjoyed you would pay the tax and move on. Do not let the tax issues mess up the plan. Be smart but focus more on making money and a repeatable model rather than getting overly concerned about the taxes. As you work off the debt and find a cookie cutter model that works for you then you can optimize the structure and tax issues.

John Corey

Re: As to your tax question - Posted by B. Whittaker

Posted by B. Whittaker on March 15, 2006 at 10:40:30:

Sounds great, thanks so much! Entity structure is a thing to hash through, I get bogged down by the details - hot & cold LLC’s, C vs. S vs. LLC vs. LP… creating an LLC for each property so a lawsuit goes after only that one, asset protection, tax advantages, etc. Everyone has different ideas. But setting up an entity is on my priority list.

Thanks - I’ll take a look at the legal forum.

B. Whittaker

Re: As to your tax question - Posted by Joel

Posted by Joel on March 18, 2006 at 23:44:48:

I always thought that an LLC per property is WAYY overboard. Maybe 5 deals per LLC seems more reasonable. Any more is just lining the lawyer’s pockets.