New to real estate investing - Ideas?

I just bought my first home in April with an 80/20 ARM. I intend to refi this coming April but would like to start looking around for an investment property, such as another townhouse to rent out. I'd prefer to find such a rental that already has tenants in it. Now, I don't have much cash to put into buying the investment property, so it'll more than likely be another 80/20 ARM. I'm okay with that, even if the rent I charge doesn't cover the mortgage and taxes (I can float a few $100's each month to cover the gap). I'm looking for the tax break I'll get with it (even though I'm not too sure how much of a break a second property will really give me on my taxes). Another idea I've had with this is to open my own "business" so I can't be sued personally (God forbid someone wanted to do that). If I do that, can I get better tax breaks for having a business while I still work full-time?

The benefits I see from this are two-fold right now: 1) I gain the tax breaks at the end of each year, and 2) I build equity in both properties.

In theory (and with all my ignorance in real estate), this plan sounds great to me. For those of you out there who are masters of the real estate trade, please point out the errors of my thinking here. This way, I can make the necessary adjustments which will help me be SUCCESSFUL in this venture. I don't see a need to go out and re-invent the wheel by repeating some painfully obvious mistakes.

I thank you all for your time and expertise.



5 Answers

  • 1 decade ago
    Favorite Answer

    As long as everything goes according to plan, your path is right on target. But what if it doesn't? Make sure that you maintain enough flexibility. Can you still afford to make payments if the interest rate increases by 3 or 4%? What about if property taxes increase? How many months can you float the payment if you have to evict someone & don't have ANY rental income for 4-6 months? What if rental rates in your area drop? Most important, what if more than one of these things happen at the same time? & how would you feel if prices started to decline? This has already started happening sporadically (detroit & boston for example)

    Financing of non-owner occupied investment property is a different ball game. There is only a minor secondary market for these loans. You won't get the same terms that you did on your primary residence. Plan on paying a 1-2% premium on the interest rate. In addition, mortgages on investment properties are usually made with a 25-30% down payment & second mortgages are hard to come by. Your payments will also be higher because 15-25 years is usually the max maturity.

    All of this is assuming that you qualify for the loan. Underwriting standards are moch more stringent for loans on invetment properties. You need to have higher income & debt coverage ratios than you did to qualify for the loan on your primary residence.

    The tax break on your primary residence is equal to your marginal tax bracket times interest & property taxes paid. On rental property, it is equal to your marginal tax bracket times ALL expenses paid (interest, taxes, repairs, maintenance, advertising, utilities, trash collection, etc). You are also able to take a deduction for depreciation. You get these deductions whether you have a job or not.

    By "open my own business", I assume that you mean that you want to create a legal corporation? This won't stop you from getting sued- if it were that easy, everyone would do it. Whether you create an S corp or LLC (or the equivalent) it won't affect you taxes because they are pass-through structures.

    Don't immediately write off other investment opportunities. You need to chase any opportunity that gives you the highest after tax risk-adjusted return.

  • 1 decade ago

    Not sure I consider myself an "expert", but we have had a duplex for 18 years, so we've seen a few things...

    My suggestion for a rental property would be a multifamily (3 or 4) unit where the rent MORE than covers the mortgage. The tax breaks will offset that anyway. Banks consider only 75% rental income because people move. A multifamily at least helps during those times you'll be advertising, doing repairs etc.

    The housing market is decreasing at this time, so I would be very careful buying. You could be buying at the "high" end of the scale. Give it a few months. We bought our property a the height of a housing boom & several years later were "$53,000 upside down". It would have been convenient to go into bankrupcy! So this is a critical part of your plan.


    As far as ARMs - You really are better off with a fixed. Over the years I've been caught twice by these things, and rates are low right now (and going up, which is why the housing market is going down).

  • 1 decade ago

    Hi Greg,

    if your rental income does not cover your mortgage and you have to supplement it out of your own pocket and hope to write it off as a tax loss - you are still out of money/loosing money in the long run - as you will pay in more than you can write off, if that makes sense [you don't get taxed at 100% but only at a fill in the blank ___% tax bracket].

    A rental property should at the very least cover your operating expenses - mortgage, insurance + taxes - with preferably some left to put aside for upcoming repairs or potential vacancies. If you look around, there are many investors cashing out and often have property that is already occupied - check the classifieds in your area. Often they also have their own realtors they closely work with, so talk to yours about this [if you have a knowledgeable realtor this could be your best source for updates on the rental market in your area!]

    You might also want to look into repos - often bank owned with better terms or more negotiable terms, as well as HUD and VA repos which allow for easier financing and possibly better terms if your credit is good.

    As far as real estate as an investment/retirment vehicle - I think there are none better in todays fickle economy - housing will always be in demand - just be careful as of where you buy - you know what they say about location, location, location...

    Good luck! S.

    Source(s): Experience and my own good sense...
  • 1 decade ago

    No Buying, No selling, Just Refering and Making Money

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  • Anonymous
    1 decade ago

    What IF things go South??

    Keep in mind...........

    Times and markets are changing!

    In California with average homes selling well over $500,000, a 20% decline is $100,000! In any market 'timing is everything'! So, could you afford a loss of 25% of your investment all because of poor timing???

    This last up cycle was 10 years in many parts of the country. The downcycle now started in CA, Wash DC, NYC, Vegas and other hot areas of the past are all soft and getting softer.

    From 1990 to 1996, the average home in San Diego lost 20% of its' value! The cycle we are now enterng looks like it could well exceed that on the downside!

    With all the 100% financing, interest only loans, EZ qualifing etc...even a slight decline will cause many to be unable to sell for the amount due on their loans!

    For some great 'insider' articles on the San Diego real estate market, which I believe will apply to any of the hot real estate markets of the past five years.....visit:



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