Question by ProfessionalMom: Rental Property (Arizona), used to live in for 12+ months – Short Sale Reprocussions?
Property in Arizona that I have owned since July of 2006, purchased and occupied for 12 months before moving to the East Coast in July of 2007. I have never been late or missed a payment on my mortgage. I now own a home on the East Coast where I live and have been renting the Arizona home for 3 years. I am $ 160K upside down in the Arizona Home and come out of pocket $ 1000+ a month to finish the mortgage, hoa’s, taxes, etc. I currently have the property listed with an agent in an attempt to do a short-sale, but with so many homes on the market it is not getting any offers. My question is, if I am able to complete a short sale will I be responsible for paying taxes on the amount the mortgage company cancels, will I be liable to have the mortgage company come after me for the difference owed since this is a rental property. Please note that the loan is still the original loan from when we lived there, so it’s not a “second property” or a “investment property” loan.
To “the tax lady” –
To make sure I am on the same page and understanding you correctly.
I Purchased for $ 270,000 07/2006.
I lived in it for 12 months and in 07/2007 converted it to a rental and the FMV at that time was $ 235,000 (this would be a $ 35K depreciation that doesn’t count).
From 07/2007 to today my FMV has dropped to approx. $ 100,000 for a total depreciation while a rental of $ 135K.
If I am understanding you correctly and I short-sale for $ 100K, my mortgage company will be taking a loss of $ 170,000 total and if I minus my $ 135K depreciation while a rental, this would leave me with $ 35,000. Are you saying that I would be reporting $ 35,000 as income on my taxes? I think this is what you are trying to say. Look forward to your feedback and thank you.

P.S. Do you know if the mortgage company can come after me for the difference or do I qualify under the Arizona Anti-Deficency Act?

Best answer:

Answer by the tax lady
Hire a competent tax professional to run a mock tax return for you.

Can you document the FMV of the house when you converted it to a rental? Any losses that occurred while it was your personal residence are NOT deductible.

When you short sell (or foreclose), you will have a sale to be reported on form 4797. You can claim any losses that occurred after it was rental.

The 1099-C for cancelled debt will be income on the schedule E and will cancel out the loss on the 4797 (for all but the depreciation you have previously claimed).

While you can use form 982, it can only be used if you are insolvent or in bankruptcy. This would save you the gain from the depreciation (the first thing the 982 does is absorb the NOL).

What do you think? Answer below!

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What makes investing in property really a good investment option? When there are other investment avenues open, why is it that investment propertynever fades out? Even while the other avenues are offering better rates of return, people still go in for investing in the real estate. The reasons are abound, from the purely financial consideration based on profitability to the more emotional and psychological reasons. Let us explore some of the reasons which make investment property hot.

Absolute returns matter: Investing a big sum in the real estate sector over a period of time can actually make you earn big after some period of time. While some other options may be offering you better returns, there might be requirement of lower sums which might in fact make you diversify more rather than putting all money in one option to get maximum returns. In property, you have to invest big.

A thing which you can own and use: Commodities or metals, most of the times, can not be used. These can only be used by selling these off or mortgaging them to convert these to money which is then used for doing anything else. Property can be used as such either for living or for work anytime that you like.

A more secure investment: Can a thief take away your property? He can of course take away the investments done on papers and deprive you of possessions but this is not possible to be done with property unless there is intentional white collar crime done against you with malicious means.

Earn income in more than one way: With investment property, you can take the rental income by leasing out your unit or you can even sell off the same during the peak rate season to get the maximum profit. Rental income can be substantial in some areas. You can retain the title to the property even while earning income from it.

While it is true that there are some distinctive advantages of it, there are some peculiarities of this investment as well. You need big sum to invest which might not be possible for everyone. This investment needs to be locked in for years if it is some under-construction project. Also, the market demand may not be all that good for selling the property or renting it at the desired rates. You might have to wait for the opportune time in future or compromise with the rates that you are seeking.

Despite these peculiarities, the investment property is still desirable since, historically, the property prices have not crashed often. These are far more stable or are always witnessing the upward trend. Downward curve happens very rarely. In a buoyant economy, the need for more residential, commercial, industrial and other spaces grows considerably and the high demand for limited spaces pushed up the prices. You can design a portfolio of investment in different properties depending on their special features and your objectives.

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Investment property financing allows you to buy any property that will provide you with a high return on investment. In short, this is money that will aid your business in making money. You can use this to purchase some properties such as condos and apartment buildings and use it to fetch for regular income and in the long run generate some capital appreciation. So rentals and capital appreciation are the two sorts of returns from property investments.

This sort of investment property financing is obtainable if you mean to make an income from the property but have no intention of living on it. If you have established business credit scores, then this would be a good help in getting a commercial loan so you could purchase some property investment as opposed to using your personal credit history, because it wont allow you to get as much money you need.

The money that you get from rent is income that will raise your monthly revenue but are taxable every year. But with capital gains it accumulates only when the property is sold, so tax is payable in the year of sale. To get the correct amount of capital appreciation, the purchase price of the asset is adjusted using an index. Therefore, the indexed acquisition cost reflects the usual inflationary effects on the cost of housing.

There many kinds of investment properties out there such as homes, commercial establishments, agricultural lands and so on. But before an investor should make any purchase of properties, he or she should have a clear vision on what type of venture that would fit his or her future plan. It would only pose trouble or it will be if an investor will dive into something without enough study or research on the intended investment.

It is wise to purchase property investment to give you additional income during the retirement period. Rent is a good means to beat the inflation as rents may increase in time and can also be mortgaged but investment properties dont come cheap. How the property is being used defines if it is an investment hence the common demand for every other real estate property is applicable to other investment property as well.

Finance is needed to buy the property since the cost is getting higher. But not a lot of banks are willing to help with investment property financing because the number of delinquent buyers have increased during the past years. That is why many bankers hesitant to provide finance for such purchase.

Theres another means to obtain investment property financing and that is to refinance the present mortgage or taking added mortgage on existing ones. The withdrawal equity can almost cover the down payment stated under investment property financing and it depends upon the number of years since the mortgage started. The good thing about raising funds is that the interest rate is almost the same as the home loans and better bargain is to extend its term by lowering the installment on existing mortgage to be able to easily manage the monthly outflows. As far as the rental income goes, the property investment really adds up the borrowers income making the borrower for higher amount of refinance or loan.

Therefore, if you have any plans to do any property investment, there are many of information out there or you may also approach other professional who can help you with any questions you have.

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Question by Mara: Help understanding UK property “leasehold”?
Most flats in London are “leasehold” which I understand means you do not actually own the property – you are a long term renter. However, most flats that I have viewed are available for a leasehold of of up to 999 years. What happens if you purchase a leasehold flat and then decide to move in 10 or 15 years? Can you then sell the remainder of the lease to someone else? Can a leasehold flat become an investment property – that is, if real estate goes up can you profit off of it?

Best answer:

Answer by RR
Yes. You can sell the lease. If property values go up, you may make a profit. The problem comes on very short leases. Who wants to buy a lease with only three years left? however, that’s unlikely on a 999 year lease!

What do you think? Answer below!

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Question by C W: What is the proper term for “Flipping a Property” ?
The best term I can come up with is short-term investment in distressed property. Anyone else?

Best answer:

Answer by Spock (rhp)
i used to call ‘em “rehab projects” when i was trying to be nice. that’s what you do, you rehabilitate the property in order to resell it to someone else.

some properties need internal rehab, others need external rehab, some need both, and many need good sales work [repositioning].

Know better? Leave your own answer in the comments!

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Question by Chacie: Starting an investment property business. Any ideas on a catchy but honest name?
There are 4 of us starting this business wanting to secure our future rather than relying on the government to help us when we are old folks. We are honest hard working-people ready to help others as well. The name should include “Investment Properties” or “Realty Investment Properties.” Any ideas?

Best answer:

Answer by Samm
Evergreen Realty Investment.

You know $ $ = evergreen.

What do you think? Answer below!

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Many of the richest people in the world have made their fortunes when the economy hit rock bottom. These people had the vision to seek out opportunities in the midst of chaos, while the masses focused on despair.

What can we learn from this? Is there an obvious wealth-building investment opportunity available to us today in the midst of all this financial chaos?

Do you have “vision”?

Can you think of a better time to invest in an asset than in a down market? The investor’s credo is to always to “buy low and sell high” — right?

There are 5 reasons why you should consider buying investment property (real estate) right now :

1. It is widely held that more fortunes have been created by real estate that any other form of investment.

2. Raw land development is the most profitable form of real estate. [On average, raw land development projects increase the value of raw land by 2-5 times its original cost.]

**  If you are following the logic, I hope you can see where this is going and how wealth creation correlates with buying investment property.

3. A professionally managed raw land development project is one of the most safe investments that a high yield investor can make. It is “safe” because the land developer will typically secure their investors’ capital investments with the hard assets of the project (the real estate itself). In addition, they will place their investors in “first lien position” for the project’s assets and revenue.

This means, in the event of a financial problem with the land development project, the real estate can be sold and investors can recoup some or all of their invested capital plus any net profits. Also, it means that the investors, being in 1st position, are the first in line to be paid, if project assets must be sold. (This is similar to the situation where a bank owns the deed on a home loan. The bank is in first lien position. In the event of a homeowner default, the home can be foreclosed upon and sold to repay all or part of the debt owed to the bank before any other creditors are paid.)

NOTE: There is no such thing as a completely “safe” investment. All investments have some element of risk. There are, however, means to reduce risk.  And, this author believes that the best way to reduce risk is to back or secure the investment with hard assets (such as real estate) to protect the investors’ capital.

4. Real estate property prices are very reasonable right now. And, purchasing investment property for raw land development is literally a “buyer’s market”. This is because landowners aren’t any different than you and me. They have been affected by the economy like the rest of us. Therefore, many are willing to sell their land for very reasonable prices because they simply need the money.

Extraordinary opportunity for investors:

In this buyer’s market, professional land developers are in “go” mode. It is “the perfect storm” for buying investment property to support their land development businesses.

As a result of today’s tightened credit markets, land developers are turning to private investors to help them acquire the raw land at record low prices.  And, they are willing to pay handsomely for the use of their investors’ money. We’re talking about legitimate, high yield safe investments folks!

5. The United States population is projected to grow +29% from 2000-2030. (According to U.S. Census Bureau statistics.)  That means the addition of 82,000,000 new people in America! And these new people are going to need new homes, new schools, new stores, and new communities to support them.

Can you guess where are these new homes, schools, stores and communities are going to come from? That’s right — from raw land development projects — the “building blocks” for all new community construction.

Summary:

There you have it.  Five fact-based reasons that you should strongly consider buying investment property.  And, specifically, investment property in the form of raw land development projects.

The timing is now.  And the key is finding the right land developer to invest with.

About the author:

John Hanlin is an Independent Investment Consultant specializing in high yield, safe investments secured by real estate. He is a seasoned investor of over 25 years.  To learn more about buying investment property and raw land development, click on this link for a copy of John’s FREE Special Report

You have full permission to reprint this article provided it is kept unchanged and published in its entirety.

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Understanding different types of loans, and knowing when to use them is essential for investing in real-estate. Different loans are used for different reasons. Specific loans may be used for holding property long term, and specific loans are used for short term holds. Each type of loan has a specific purpose when investing in real-estate. Learning each loans purpose is essential to ensure the right loan is being applied to the correct investing strategy. Investors can get crossed up very easily, costing them a lot of time and money. Knowing when to use a specific type of loan can be the difference between making a lot of money and losing a property to foreclosure. Below is a list of the most popular loans used by investors.

• Fixed Rate Mortgage – This loan is probably the most common loan used by average real-estate investors. It is also one of the safest to use.

The interest rates are locked for the entire life of the loan. This loan usually comes in terms of 15 years, 20 years, 30 years, or 40 years. The longer the term, the lower your payments will be. Obtaining the lowest payments may sound good, but a longer term equals much more interest paid to the bank. Choose a term that will allow the most cash-flow out of your investment property. This is the perfect loan for a property that does not need rehab and is to be held as a long-term investment.

• Adjustable Rate Mortgage- This is the same type of loan that has recently been the cause for many foreclosures over the last couple years. People have been steered away from these loans. This is not a bad loan if investors understand how to use it correctly. These loans usually come in 10/1, 7/1, 5/1, and 3/1.

The number before the one indicates the length of the first term. After the first term the payment will increase to a higher fixed interest rate. The first term payments may be cheaper than a conventional loan, but after it adjust the payments will significantly go up. This loan is best used for property intended to be sold before the end of the first term. The advantage is that the investor will have a low mortgage payment for the first term.

• Interest Only Loan- This loan can be used for property with a lot of equity already built into it. If investment property has a lot of equity in it, then paying down the principle and creating more equity may not be important. Accomplishing positive monthly cash-flow may be more important. For example, let’s say an investment property was brought, and the seller left ,000 in equity for the buyer. The buyer decides to rent the property and then sell it in 5 years. The investor can make cheaper payment to the bank because he is only paying interest on the property and no principle. Therefore, the investor can make more money renting the property because he is paying less in mortgage payments. The investor has ,000 in equity, 5 years of appreciation, and 5 years of profitable rental income. In this case an investor may want lower mortgage payments, instead of paying principle and interest on property that already has equity– and will be held for only 5 years.

• Seller Financing- This is good way to buy a property from someone who may own a property free and clear. A lot of times you can negotiate these deals with no money down and no credit check. People who own property that may need repair are more likely to agree to seller financing. Many people avoid buying property that need extensive repair. These properties are hard to sell, so the owner is probably open for different ideas of getting rid of the property. The goal is to get 0% interest and no payments. This may seem unlikely, but surprisingly some seller financed deals are structured this way. If the seller does not agree, then negotiate the cheapest rate and term possible.

• Hard Money Loan- This loan is normally used for property that is going to need repair. This type of loan allows investors to finance the money needed to buy and fix investment property. Be very careful. Be sure you are able to get out of this loan quickly. These loans are short term, and a balloon payment is due 6-12 months after the loan originates. Buy and fix the property, then refinance before the loan is due. Although, lately investors have been getting caught with their pants down. The banks have been making it harder, and harder to refinance out of these types of loans. In some cases, investors cannot refinance due to seasoning issues, and the loan becomes due before they can secure permanent financing. Before using this loan get pre-qualified for long-term financing, and be sure the investment property adheres to all guidelines and financial conditions for the new loan. In some instances, investors can walk away with money in their pocket if everything goes accordingly.

There are many other loan products on the market . Each loan is designed for a specific purpose and a specific person. Each loan has its own risk, some more than others. The important thing is to learn and understand the loan. Plan your strategy and choose the loan that makes the most sense for the strategy in place. Make it work for you and not against you.

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