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kajasmom
05-23-2005, 09:55 AM
sorry, i posted earlier to the wrong forum

Greetings-

Have a question-We own our home in MD.A close friend who lives in Texas suggestedfor use to invest in rental properties in Texas, where houses are cheaper and will help in reducing our taxes. Another friend suggestion section-8 rental investment in Baltimore, MD. We have 2 young children, saving for their education, i am currently contributing 15% to my TSP and husband 12% in his job's retirement plan.

Any pros and cons to investing in rental properties with the current market? or should we just save the money

Thanks

teknobucks
05-24-2005, 07:37 AM
do not have enough data to answer your ?...do not know your market/s.

what are the vacancy rates? if it is a killer deal why did useveral states away have a shot at it? why didn't the realator/banker/appraiser buy??

how will you manage/control a distant rental? tenants unions in some states like calif. will cut u up! taxes on non-homesteded properties in florida will kill ya!!!!

will you have positive cash flow? did you buy an REO (re owned by bank)? if so will they carry u at a low rate/payment? arm/interest only/balloon...get that low payment!

I like waterfront/beach prop (only so much avail. with super high demand)...feel you will have more time to run for the door if she goes down. like using a short term arm whilewe remodel. if we get stuck and can not flip the property ASAP we can always live in it, enjoy the view and refi to a fixed.

most of the time u want to hold the prop. two yearsto avoidcap gains...if u r in military may be a shorter term.



I can say that everyone is callingthis a bubble. but really rising prices is a trend...... and not a bubble until.......God forbid.

and if the re market really does collapse then we will probably go into a major depression and no one will come out on top other than a gold bug perhaps.

real estate is a much better investment than anything i know of......jmho

good luck and hope this helps u

tekno

PS: for those predicting collapse.......I dare you to sell your home and move to an appartment.

pyriel
05-24-2005, 08:16 PM
kajasmom wrote:
Have a question-We own our home in MD.A close friend who lives in Texas suggestedfor use to invest in rental properties in Texas, where houses are cheaper and will help in reducing our taxes. Another friend suggestion section-8 rental investment in Baltimore, MD. We have 2 young children, saving for their education, i am currently contributing 15% to my TSP and husband 12% in his job's retirement plan.
Any pros and cons to investing in rental properties with the current market? or should we just save the money

Your friend's advice: I'd say you have to do the number crunching. PM meyour email add so I can send you the excel worksheet that I use when I look at a property. All you have to do is fill in the blanks and it should tell you (in the surface) if the investment in TX will make money for you or not. You dtill have to do your due diligence.My advice is you should start in your own backyard so that you can learn to be a landlord. Once you become an expert, then you can start branching out to TX (I believe they are about 1,500 miles from MD). Reducing taxes is great but if your real estate investment is going to lose you money, you might as well pay the taxes (less headache for you).

Section 8: I have an 8 unit apartment full of section 8. I love them. Lots of paperwork but it is worth it. Uncle Sam pays me IFT every first of the month. Tenants can be handled easily because GHURA will not put up with that. However, you need to learn how to be a landlord so that you can easily take care of those who might give you problem. For me, I've never had problem with them. Our GHURA office here doesn't play games with my tenants. If they don't pay or don't follow whats on the lease agreement, I just write a letter to their case worker.

Sorry I can't be specific since I don't havea lot of info from you. I totally agree with Tekno that real estate is one of the best investment out there. You just got to know how to use it. Just my .02.

Pyriel

pyriel
05-28-2005, 06:03 PM
Some of you requested for the excel worksheet that I use before I buy a property. I am in the middle of purchasing a 4plex and I am attaching a copy of the same excel worksheet that I used to analyze whether the property will make money for me or not...

Seller and I closed on 20 April and he gave me 60 days to find financing (I was asking for 90 days but he won't budged). He did give me permission to start my renovation. At first he was hesitant but I told him that he can't lose since if the deal doesn't go through, at least his 4plex will be in better shape now than before. I found a bank that would give me financing and they wanted to close on 26 May 05. I informed them that I want to close on 1 July. The owner is in Hawaii and since he has been a little late on giving me the things that i requested for such as blue prints, lease agreements etc. etc.I told him that we will close on 1 Jul. He said ok. The reason why I kept pushing the closing date further is because it gives me time to fix the property. This way, I can make the 4plex more attractive for the new tenants I will be bringing in (I have 2 on the waiting list). The appraisal came in at $220K and the bank is willing to give me $30k equity loan once I close the deal (purchase price is at $160k so the property has $60k equity). Can you imagine that? I would get all of my money I invested plus more and all I will be doing is play with Other People's Money (OPM)... You sure can't get that from stocks...

Now my real estate agent had told me that if the property has been appraised for $220k now, it would surely appraised more once I am done with my renovation. He said that we should put it in the market for $210k. This is called flipping. However, since I am a passive investor, I think I will keep the property and just do what the bank is offering me and that is to get an equity loan. This way, I get all my money back that I invested and still get the passive and phantom income that goes with it.

Real estate and landlording is not for everyone. I happen to enjoy it. Right now I am under -2% in TSP for the year so it really gives me pleasure to see that I am doing ok with my real estate deals.

Goodluck to all... Pyriel

Birchtree
05-30-2005, 11:25 AM
Pyriel,

Equity loans are based on variable rates, right?



See if this data would be of concern to the recent property owner who is leveraged for more house than they need. About 450 billion of ARMs will come up for refinancing in 2006, almost certainly at short-term mortgage rates that exceed the loans' initial levels. Does the Fed want to create a consumer credit crunch when that refinancing occurs? If they proceed with rate increases they will.

We all assume our own risk tolerances. But this industry is in the spot light - everybody wants a piece of the money action. I have a 5.23 acre plot that I get requests on to sell - from as far away as California. My contrarian nature has me nervous - I don't trust the Fed - they will come up with something to hurt everybody. They are presently after the Freddies and that may be the focal point. If they faulter everyones' rates will be adjusted upward - causing undue pain.

pyriel
05-31-2005, 02:22 PM
Birchtree wrote:
Pyriel,

Equity loans are based on variable rates, right?

See if this data would be of concern to the recent property owner who is leveraged for more house than they need. About 450 billion of ARMs will come up for refinancing in 2006, almost certainly at short-term mortgage rates that exceed the loans' initial levels. Does the Fed want to create a consumer credit crunch when that refinancing occurs? If they proceed with rate increases they will.

We all assume our own risk tolerances. But this industry is in the spot light - everybody wants a piece of the money action. I have a 5.23 acre plot that I get requests on to sell - from as far away as California. My contrarian nature has me nervous - I don't trust the Fed - they will come up with something to hurt everybody. They are presently after the Freddies and that may be the focal point. If they faulter everyones' rates will be adjusted upward - causing undue pain.

Birch, yes, it is an equity loan. however, if you do the numbers, it would show that the risk is very low or none at all if I was to do an equity loan. By doing it, I get all of my investment + more. so my cash on cash return investment right off the bat becomes 100% by doing an equityloan. Now what we have to look at is, does the property have enough passive income to offset additional pmt to the loan. Answer to that is yes.

The equity loan you are talking about that you need to be concern is how many of those 450b ARM is a home equity loan without passive income. I bet about 95%. You are right about this being dangerous but passive income investors don't look at this serously because they are not paying the mortgage; their tenants do. What they are more concern about is their income to expense ratio. More income + less expense is the name of the game. Home owners that max out their equity loan on top of their mortgage is categorized as having more expense + less income.

P

Skip
06-07-2005, 09:27 PM
did you leave out proptery taxes ? utillies that you pay ? vaccancy rate.. ? also raising rent 250 bucks at one time ?

I have a 5 plex in cincinnati.. gov paid me 9000.00 last year in deductions ....
has a positive cash flow more than the SS I will receive at 62 and only about 5000 out of pocket to buy it... Sweet... return for 5000. Plus you have some time involved...

Skip

pyriel
06-08-2005, 10:55 AM
Skip wrote:
did you leave out proptery taxes ? utillies that you pay ? vaccancy rate.. ? also raising rent 250 bucks at one time ?

I have a 5 plex in cincinnati.. gov paid me 9000.00 last year in deductions ....
has a positive cash flow more than the SS I will receive at 62 and only about 5000 out of pocket to buy it... Sweet... return for 5000. Plus you have some time involved...

Skip

Skip, I don't pay utilities, tenants do. However, for my section 8 tenants, I do pay for them since Uncle Sams reimburses me for it. As far as property tax is concern and insurance, bank wants me to put it in escrow as part of the VA loan. This means that itbecomes a part of my monthly pmt.Property tax here is pretty cheap unlike the one in the mainland. Vacancy rate is something that I missed to put there. I believe that I did that intentionally because 3 each of the units are already rented and i have 2 each on the waiting list. funny thing about vacancy rate is that it goes into your pocket if your rental is full. Current tenants are paying $300, $300, and $400. They are definitely way below the market rent here on Guam where $500-$600 is usually the norm for a two bedroom. Seller is in Hawaii now and property was passed on to him. So he really doesn't know landlording. He lowered down the rate just so tenant will not complain. Wrong move on his part.

Because of the loan being VA, they are lending me extra money to purchase appliances that are energy efficient. I found these stainless steel stoves and fridge and got a good deals on airconditionings. This appliances should bring the value of the property a lot higher and makes it more attractive for tenants. Not to include the depreciation that i'll get from them over five years.

Isn't it great to know that your positive cash flow now will be more than your SS? The funny thing is you are getting it now and not when you turn 62. Thank you for verifying what i've been trying to say on this board.

FundSurfer
06-10-2005, 02:51 PM
Pyriel,

Couple comments: Your worksheet should include equity gained in 5 years. (Principal paid toward load and estimate of increase in value.) That equity is prime for use to purchase the next property right?

Looks like you got a very good deal for the complex, I would have thought Guam would have been more expensive. If that is indicative of real estate prices in Guam, I'd think you should be buying and holding as much as possible.

Do you think it would be possible to rent these units as vacation rentals? I remeber when I was in Guam, the Japanese tourist paid double to triple what Americans paid.

Are you renting to servicemen?

Do they still have **** fights in Guam or is bird flu worries hit there as well?

One other question, do you have a formula that you use to determine rental value (ie so much per bed room and bath room)? Or do you just base it off of what things are going for in the paper?

pyriel
06-10-2005, 11:51 PM
FundSurfer wrote:
Pyriel,
Couple comments: Your worksheet should include equity gained in 5 years. (Principal paid toward load and estimate of increase in value.) That equity is prime for use to purchase the next property right?
Looks like you got a very good deal for the complex, I would have thought Guam would have been more expensive. If that is indicative of real estate prices in Guam, I'd think you should be buying and holding as much as possible.
Do you think it would be possible to rent these units as vacation rentals? I remeber when I was in Guam, the Japanese tourist paid double to triple what Americans paid.
Are you renting to servicemen?
Do they still have **** fights in Guam or is bird flu worries hit there as well?
One other question, do you have a formula that you use to determine rental value (ie so much per bed room and bath room)? Or do you just base it off of what things are going for in the paper?
Fund, Hmmm... you really have been around.... You are right about the equity gained. Didn't even think about that. I guess it is because I don't hold value to it too much unless I am remortgaging or doing an equity loan. Japanes tourists are still here but they sold off all of their investments just like what they did in the mainland. No I am not renting to service member. However, if we do get (wishful thinking here) the aircraft carrier, I will definitely switch clientele and will cater to military.Right now, best paying customer is section8 under GHURA. No hassle with being paid on time because they are all EFT. Yes, they still have cockfights here but I have never seen one. Not into animal violence... No formula for rental value. I do look at the newspaper, internet, MLS listing all the time. After awhile, you start seeing patterns of the rental market. You will never see it in a day or two or even a week. You just have to keep reading and you'll see that they will either climb or they will go down. They are now climbing here...

FundSurfer
06-13-2005, 12:12 PM
Carrier??!? The young male locals won't like that much. We had lots of fights between some of the local young men and the servicemen as it was, when I was there. I guess they do have a deep water access.

Do you find your prospective rentals in the paper? FSBO's?

I just moved so I've been thinking about buying rental property. The problem where I live is that there appears to be a bunch of rentals already available. It is hard to make money if you have vacancy. I guess I'll just need to watch the market for awhile.

pyriel
06-13-2005, 03:03 PM
FundSurfer wrote:
Carrier??!? The young male locals won't like that much. We had lots of fights between some of the local young men and the servicemen as it was, when I was there. I guess they do have a deep water access.

Do you find your prospective rentals in the paper? FSBO's?

I just moved so I've been thinking about buying rental property. The problem where I live is that there appears to be a bunch of rentals already available. It is hard to make money if you have vacancy. I guess I'll just need to watch the market for awhile.

Im not holding my breath on the carrier. We just don't have to infrastucture to accomodate that big of a boom. If I am in the carrier, I sure would love to be stationed in Hawaii. I find my rentals from the paper and real estate agent. I usually do both. I just signed a contract with an agent yesterday to have one of my unit be put inthe MLS. He gets one month rent if he gets it rented. But i put a clause that I be allowed to look for my own tenant. If I get it rented first, then he gets nothing.

I always tell people to watch the market for six months. Do it by looking at newspaper, driving around,and the mls listing. IMHO six months is a good span of time for someone to really get familiarize with the market within a certain area. Get to know some real estate agent and tell them that you are planning to buy a property for investment. But don't buy right away. Keep looking. Somehow, you'll find out that you can start figuring out in your head how much a property is worth in a certain area. Start hanging out at home depot. You might as well start learning the cost of items there. This way, when you look at a property you can start guesstimating how much it will cost you to fix a unit. This 4 plex that i bought took me less than 10 minutes to figure out in my head that it will cost 10k to fix (guesstimate). So far, i'm off 2k but that is a pretty good ballpark..

Shaggy
06-14-2005, 10:47 AM
Sent you a PM Pyriel due to the detail. hope you can help.

pyriel
06-22-2005, 05:43 PM
Update: 20 feet away from the 4 plex, is another 4 plex. I just learned from my real estate agent that it is pending sale for 250K. Hmmmm... bought for 160K, renovate for 25k. Hmmmm... Hold it for six months then will most likely sell. Do a "1031 exchange" to buy a rental 4 bedroom house. Transfer all proceed so that I don't incur any tax. Let me see... If I sell for 250k minus 185k (pay the bank and get my 25k that I also borrowed from another bank) that will be a 65k return for zero (0) money invested since I borrowed all the money to front this deal. Hmmmm.... What would be the return on that?

Now the problem is how to not pay a single penny on this profit. Here is how and anyone can do this. 65K tax in a 30% tax bracket would net the government 19,200K. Now how do we rob Uncle Sam from touching this cash. One way is to do a 1031 exchange. To do this (new investor = this is a little complicated and you must really read up on 1031 exchange before you proceed on doing this). Before selling, one must declare an intention to do a 1031 exchange. Like what I said, I plan on buying a 4 bedroom house for rental. If I can get one for 130k, put all the proceed for down payment (65K), My mortgage will only be 65k. 65k on a 25 year loan 5.5% with no PMI and no prepayment penalty will come to about $350.00 monthly payment a month. Section 8 tenant for a 4 bedroom house pays 1500k here.

Now here is the fun part to rob Uncle Sam of their precious tax and it is all legal. You can then remortgage the loan to lets say 130k (or less). Yes, you will incur additional closing cost but the proceed you will get after paying off the first 65k loan is all yours. Since it is a loan, you do not have to pay taxes on it. Hmmmm....

You still have the property for rental and for tax deduction. Your new loan for 130k, 7% APR, 30 years will cost you about $900.00. Still be ahead with positive passive income from the 1500k Section 8 will pay for a 4 bedroom house.

Now, what to do with the additional 65K? My wife is asking a 5 series BMW. I told her, i'd think about it... :^

mutton$
06-23-2005, 08:44 PM
I have been tracking waterfront/beach property. Within only a year's time, the price has doubled. How can these rapid rates continue at this pace? Do you think the real estate bubble is going to burst as the stock market did?

pyriel
06-23-2005, 09:03 PM
mutton$ wrote:
I have been tracking waterfront/beach property. Within only a year's time, the price has doubled. How can these rapid rates continue at this pace? Do you think the real estate bubble is going to burst as the stock market did?
One thing is for sure, there will be a bubble. The question is when. So far, interest rate, economy, and the banking system are still intact(crossing fingers here). Fed is really more proactive this time. Real estate is also slow to react to up and down swing. For now, all I am seeing is up. However, many people are jumping in which means one way or another, something has to give.

One way to hedge the real estate market is to ensure that you only buy what you can afford in case there is a downward swing. You should be asking yourself that if the market tanks within 3-4 months and the bubble last for 2-3 years,would you be able to survive without having to liquidateon a loss? If the answer is a resounding "NO" I would say that you should hold. The best buysout there is during the bubble. You can get them properties for 50 cents to a dollar (or even less).

As for your question concerning the rapid rates of properties going up, We have alot of speculators out there now and they are all hoping to flip properties. I've read in one article that a property being built could change hand 3-4x from start to finish. This is risky if you don't have enough to cover yourself on a loss but profitable if you can ride it even if there is a downswing... Just my .02.

mutton$
06-23-2005, 10:15 PM
On our last visit to NW Florida, we were amazed at the number of new high rise condos that were being built all on pre-construction money from investors. Makes you wonder if those investors are going to be able to ante up when their time runs out on their credit stakes. With the volume of condos and creditors, it would be catastropic should the well run dry. Where is all the money coming from to pull this off?

Shaggy
06-24-2005, 11:45 AM
Pyriel- You said "The best buysout there is during the bubble". Don't you mean the best buy out there will be after the bubble bursts, not during it's creation- RIGHT? or am I misunderstanding?

mutton$
06-24-2005, 07:32 PM
Post script to my earlier message:

Talked to an investor who "in the heat of the moment" bought 4 pre-construction loan condos on the FL gulf. Bought through letter of credit from his bank with a 15% depositof total selling price. He is trying to unload them now, because they are allcoming due. He said that the developer assured him that he would be able to make money on the loans as they would appreciate by the time the construction was finished. He says thatwith the number of units being built in such a short time, and the high prices that's being asked for the units, he has learned his lesson the hard way. He admitted that he had overextended himself with these loans, plus he is paying on a home equity loan with an adjustable rate.

Does anybody have any suggestions for him?

Birchtree
06-24-2005, 08:13 PM
Yah,

Have him buy more insurance than he needs and when the next hurricane comes along he may get saved with total destruction of the property. This season is supposed to be worse than last year. Take cover.

mutton$
06-24-2005, 10:27 PM
I'm afraid the poor chap probably won't have anything left to buy insurance with:oo

pyriel
06-24-2005, 10:38 PM
mutton$ wrote:
Post script to my earlier message:

Talked to an investor who "in the heat of the moment" bought 4 pre-construction loan condos on the FL gulf. Bought through letter of credit from his bank with a 15% depositof total selling price. He is trying to unload them now, because they are allcoming due. He said that the developer assured him that he would be able to make money on the loans as they would appreciate by the time the construction was finished. He says thatwith the number of units being built in such a short time, and the high prices that's being asked for the units, he has learned his lesson the hard way. He admitted that he had overextended himself with these loans, plus he is paying on a home equity loan with an adjustable rate.

Does anybody have any suggestions for him?

Birch, you are so funny... Mutton$, overextending is one of the pitfalls of real estate speculators. Even with what I am doing,the 4 plex i bought is a speculation (until I actually sell it). Anytime someone buy real estate, IN HOPE, of selling it later on a higher end is speculating. However, the 4 plex I bought could also provide passive income if I decide to keep it (which what makes it, in my category, an investment). It also pays for itself right in the beginning which helps reduce money coming from my pocket. Readers, please be careful with real estate speculation. Passive income is the key. Having your real estate increase in value later is an icing on a cake. Asfor your friend, i'd suggest for him to unload (if he really is in a bind) even if he does not make profit.By doing this, he lives anotherday to redo his strategy. If he waits till later and he endup notbeing able to come up with payment, his credit score may suffer. Bad idea if he wants tocontinue with real estate investing.

As for the other question about the housing bubble.Sorry, I meant to say thatwhen the housing bubble burst is the best time to buy.It will come, I guarantee it. Whenwill it happen is anyones guess...

michelleunit
09-12-2005, 06:36 PM
Hi everyone-

i'm new to the board and have a question, it would fall under this topic (please advise if i should have started another one).

we have a rental property (single family home near an air force base - it has been on the base closure list before, so that's a slight worry) that we used to live in, but relocated and kept it as a rental (renting to military only). we have an agent (who earns 10% per month - the property is about 300 miles away).this VA mortgage will be pd in 12 years. if you need more info,just let me know!

my question: i'm thinking we'll have it as income property when the mortgage is paid off. until then, we have a loss every month rent $800, agent fee $80, mtg pmt $774. is there a smarter way to be doing this? as it is now, i don't consider it an income generating property (although it is increasing our equity)

my husband sometimes thinks we should refi for 30 years, but i like the idea of having a property paid for in 12 years (a little sooner, if i can squeeze in a13th pmt every year-any benefit to doing that?). plus it will be something i can fall back on should something catastrophic happen. we are currently living in another single family residence (FHA mortgage).

our son will be attending college next year and possibly working, but living at home. we are wanting to be sure we are in a position to pay uncle sam as little as possible.

i am interested in the section 8 scenario, but not sure that i could do something like that long distance.

we are both veterans, so i'm not sure if i could get another VA mortgage or not. i think we have to live in that property for 3 years to claim a VA loan.

i know this is a lot, please forgive the cross-over of topics!

thanks again everyone-
michelleunit

pyriel
09-12-2005, 10:39 PM
michelleunit wrote:
we have a rental property (single family home near an air force base - it has been on the base closure list before, so that's a slight worry) that we used to live in, but relocated and kept it as a rental (renting to military only). we have an agent (who earns 10% per month - the property is about 300 miles away).this VA mortgage will be pd in 12 years. if you need more info,just let me know! Please provide original mortgage, insurance cost, and property tax. VA is usually 30 years loan. Does this mean that you had this property for 18 years? Also need original appraisal and what do you think it will appraised for today's market.

my question: i'm thinking we'll have it as income property when the mortgage is paid off. until then, we have a loss every month rent $800, agent fee $80, mtg pmt $774. is there a smarter way to be doing this? as it is now, i don't consider it an income generating property (although it is increasing our equity) You are not only losing $80 a month but you are also losing insurance cost and property tax cost (and repairs?).

my husband sometimes thinks we should refi for 30 years, but i like the idea of having a property paid for in 12 years (a little sooner, if i can squeeze in a13th pmt every year-any benefit to doing that?). plus it will be something i can fall back on should something catastrophic happen. we are currently living in another single family residence (FHA mortgage). Hmmm... He could be right. Need to see the other # so I can put it in my program. Doesn't make sense to have a rental property to lose money. Gaining equity is only good when you sell. Since you plan to keep this and pay it of for 10-12 more years, your equity gained is useless. Think about it $80 x 12 = $960 per year. Insurance cost maybe 1k per year and property tax of 1k per year. Estimate of $2,960 per year. What about factoring in $500 per year for vacancy rate if the tenant stayed for two years. Now youare losing $3,460. What about repairs?Lets say $250 per year so now you are losing$3,710 per year. Doesn't make sense to lose that much per year so that you can gain equity that you never use. Now, if you remortgage for30 years with cash out and with very low interest rate, what do you think your monthly pmt will be?If you can get it down to 600 per month then you will have a positive cash flow and you received a cash out from your equity. Need the info to make more assessment.

our son will be attending college next year and possibly working, but living at home. we are wanting to be sure we are in a position to pay uncle sam as little as possible. Gaining Equity will make you pay Uncle Sam more. If you want to pay Uncle Sam less then you need to remortgage.

i am interested in the section 8 scenario, but not sure that i could do something like that long distance. Your property manager can also do the section 8 for you.I havelots of them and their check goes EFT to my account.

we are both veterans, so i'm not sure if i could get another VA mortgage or not. i think we have to live in that property for 3 years to claim a VA loan. Nope, there is a misconception that you have to live in a property when you use a VA loan. You don't. All you have to do is "to intend to live in it." You will see that in the VA loan and other documents associated in processing a VA loan. There is an assumption that you have to live in it but the "intention" is what the defining factor for you to get out and not live in the property. I bought a 4 unit apt in 4 July 05 using my VA certificate for 170k. I had "INTENDED" to live in it but after I had fixed it for 25k (I borrowed it from another bank) I decided that I can't let my two children live in an apartment complex with only a 2 bedroom 1 bath unit. I then decided to sell it for 250k and it is currently in the bank being processed for another VA loan (buyer is a veteran) and the same bank.

i know this is a lot, please forgive the cross-over of topics!

thanks again everyone-
michelleunit

michelleunit
09-12-2005, 11:17 PM
pyriel-here goes:

we've had the property since 93 and when we refinanced it 3 years ago, we knocked a few years off of it (i think from 20 to 15?) my thinking at the time was to pay it off sooner than later. its looking like that was a bad decision? so this current mortgage original amount was 57430 @ 6%. insurance 1135, taxes 1925. yes, we've had repairs and expenses over the years, i didn't itemize them in the post (we did itemize them w/ our tax preparer)...appraisal district has us listed at 64900 that's probably a good figure. i don't know whatthe going rates are that i can get for a refi...at wells fargo it shows a payment of 553.00 (dunno how accurate this is) do you need the current balance?

now i'm wondering about the refi at 30....this would be the 2nd time to do a refi...i'm guessing you have a program to see if that's worthwhile? what does 'cash out' mean? you're not talking about an equity loan, are you? (sorry, i'm obviously uneducated here..glad to be able to ask you questions :))

i don't understand the factoring in of vacancy rate if the tenant stays for two years..(?) our current renters just moved in in july for a 12 month lease. they plan to be at the base for 3 years...so i guess we could increase the rent next year...

i feel like what i've done with this property probably would've sent you to the hospital with a heart attack....well better to learn from my mistakes sooner than later..

thanks for your help and .02!

michelleunit

biggdog1
09-13-2005, 02:00 AM
Michelle I noticed your aPost Office Dog like me. I seen your birthday as 11/13/1900. Aren't you a just a little past retirement :shock:!!! I'll be leaving May06 with 37 years.

pyriel
09-13-2005, 03:22 PM
Michelle,

Please bear with me for more info. Need current balance of the loan. Also, I need for you to guesstimate (per year) of your repairs. Just ballpark the figure. Will also need the money that came out of your pocket when you refinanced. Just ballpark the figure.

You mentioned Well Fargo as one of the means to borrow. It is very easy to borrow from them but their interest rate is very high. People who usually go to them (as well as other like them) are those who have a lower credit score. Is that the case here or you just went with them (or others like them) due to convenience. I usually use them for last resort or to purchase fast moving property.

I'll have a recommendation for you soon.

michelleunit
09-13-2005, 06:29 PM
pyriel: balance 51355.81; average guestimate of annual repairs...200-300; money at refinance @400 (?)...we're with wells fargo cuz that's where the refinance company serviced the loan to, so we just kept it there for convenience (our checking accounts are there as well)

hope this helps you assess my damage!

thanks-michelleunit

michelleunit
09-13-2005, 06:47 PM
yes i am postal (of course, not born in 00!) am 37, and am about 1/3 of the way to retirement and wanting to plan for it and enjoy it.:D

michelleunit

pyriel
09-13-2005, 08:12 PM
Michelle,

When it comes to borrowing money, don't ever limit yourself with one bank. Always get the best rate even though the bank is thousands of miles away from you. Best rate is always what you are looking for.

As of now, your cash on cash investment on your refinance is $400. I said this because this is money that came out of your pocket when you did your refinanced. Right now you have a negative cash flow with your property and you are losing 138% of your cash on cash investment. This means that every year, you are losing $552 and they are coming out of your pocket. TSK, TSK, TSK... In five years, you would have lost a total of 690%. This looks like my return here at TSP. You've been doing this for 3 years now. I'm sure, you wouldn't want to do this for the next 12 years.

Don't worry, there is a fix to this. Go ahead and refinance for 30 years using your current balance. If you can get a lower interest rate somewhere that would even be better. If you refinance for 30 years at 6% and if your refinance cost is $500 (your last one cost $400) you will then have a positive cash flow of 524% per year or $1,572 per year. In 5 years, your cash on cash return on your $500 dollar investment for refinancing (again) will come up to 1,572%. Your return is actually higher than this because if you factor in the negative cash flow of $552 that is currently coming out of your pocket + the $1,572 that you will be receiving, you will then have a positive cash flow of $2,124.00 or an equivalent of 708% per year or 2,124% for 5 years. Now that is better than any return you will ever see here at TSP.

Please see attached worksheet...It has two sides. The first one has the current and will show how much you like being a Santa Claus and the other one shows how you can start receiving your early christmas gift. :D

Now, I want you to invest all of that cash you will be getting. I will even hold it for you if you like. hehehhehehehehe

michelleunit
09-14-2005, 07:27 PM
hi pyriel-

wow--thanks for the xcel document...i've gone over it, trying to get a thorough understanding of the numbers...but you have toconfirm one figure to me. under 'cash on cash return for 5 years'...you have a figure called 'yearly cash on cash return'. is that the downpayment amount divided by 5 years? and then that amount is divided into the annual income?the math seems to work out to that. (note: our tax preparer never asked for an insurance figure, so i never included it on our deductions! now i'm going to have to file amendments on previous returns!!! perhaps it's time to change preparers!)

i hadn't hadthe 'business' of rental property explained to me in the terms you have set out. that is, where money paid at refinance is actually considered the 'amount invested' and that amount is what you base your return on investment. it brings the rental business into a new light for me. i thank you for shedding this light in my (and others') general direction(s)!!

my mindhas been thinkingof the mortages as a debts i personally owe (like a car loan)for the house and having renters help pay down the mortgage is 'building equity'. i have to train myself to think of it as 'return on investment (downpayment)' and go from there.

what do you find is the best way to seek out your properties?

michelleunit

pyriel
09-14-2005, 08:06 PM
I'm currently doing another worksheet for you... How would you like to be paid back for all three years that you lost money? hehehhehe...

Fire your tax preparer. The difference between him and you is that he took a week course. My advice to you is to take a tax preparation course. I think it only takes a week. This will be money well spent and now you have a way to pay for the course. Once you learn what is required and what you can get away with you'd see things, like spending money,in a different way... By the way, did he tell you that the money you paid him for preparing your tax return last year is also tax deductible for this year? More to follow when I answer your question in "how to save taxes."

Here is a question for you and to others, what is your cash in cash return for TSP? The answer is zero. It is zero until such time that you start taking out money from your retirement. So if you are seeing Tekno's return of 14% and my measly 3% return for the year, the cash in cash return is still zero.... This means that I put in 10% of my pay (i'm military) and I am not getting anything back at this time.

Now for real estate rental like what you are doing. When you buy a rental house and you put10k to purchase a 100k house. Your investment is really only 10k. This is because 10k is what came out of your pocket. What you did is use Other People's Money (OPM) to get an investment for 100k. Try doing that with stocks, IRA, or TSP (NOT!). Once you get your money back from the positive cash flow, you are now playing with other people's money. Even if they foreclosed on your property or you sell it at face value, you already got your money back. And I am not even including depreciation, insurance expense, property manager's expense, repairs, appreciation, property tax, etc....

Sorry.... Got carried away hehehehe... Will post the other worksheet later...

pyriel
09-14-2005, 08:15 PM
michelleunit wrote:

wow--thanks for the xcel document...i've gone over it, trying to get a thorough understanding of the numbers...but you have toconfirm one figure to me. under 'cash on cash return for 5 years'...you have a figure called 'yearly cash on cash return'. is that the downpayment amount divided by 5 years? and then that amount is divided into the annual income?the math seems to work out to that. (note: our tax preparer never asked for an insurance figure, so i never included it on our deductions! now i'm going to have to file amendments on previous returns!!! perhaps it's time to change preparers!)

Dang, I didn't answer your question. One year and five year cash on cash return. What is the difference. if you put in $500 to refinance and you get a postive cash flow of $1572 after everything is paid then your cash on cash return on your investment for the year is 314%. I put in 500 widget and after one year I get beck 1572 widgets then that is a 314% return. Just multiply that by 5 for 5 years. $1572 multipy by 5 = $7860 so in five years the return on your $500 is 1,572%. Isn't this mind boggling? Can you imagine getting that in TSP? And they say real estate is HIGH RISK. You want to know what is high risk? I just went 100i yesterday. Now, I am hoping that the market will go up. I can't do anything but wait for the market to bounce. That is high risk. With real estate, I just look for another tenant when the other one moves out. Plus I researched the property using that worksheet I provided so that I know I will be making money before I even purchased the property... Hope this helps...

michelleunit
09-15-2005, 06:49 PM
hi pyriel-

yes!--getting paid back for three years of loss would be awesome...the sad thing is the preparer used to work for the irs...so i thought the preparer, having had that experience, would be toour benefit. where do you recommend i take the tax prep course? and yes, we claimed the tax preparer's fee.

well i'm also interested in working the OPM system. is there already a thread on that somewhere that i haven't found yet? if so, where is it? if not, can we just continue on this thread (is that what this is called? or board?)

when you buy rental property and get a mortgage, are the rates higher because it's an investment property? i've been telling my son whenever he moves out, to buy a duplex, triplex or 4plex. told him that's what i would've done if i could start all over. so at least he can be ahead of the game and not waste his money on rent! i think he believes me!

also, can you give me some recommendations on how to learn about section 8? and the 1031 exchange too? are there specific books that cover this? thanks again for all your information, time and efforts to educate us! your efforts are appreciated!

michelleunit

pyriel
09-18-2005, 09:01 PM
Michelleunit, Go ahead and refinance for $55k instead of $51,356. The difference in monthly mortgage will be $22.00. If you do this, you will get all your losses back ($1,656)+ you get extra money to pay for the closing ($500) + extra money into your pocket ($1,488).

Your cash on cash return to your investment will also go up since the $500 you will use for your closing came from OPM and not from your wallet. See attached worksheet with 55k tab... The jump is significant... Your yearly cash on cash return jumped from 524% to $1308% per year. For five year cash on cash return it jumped from 1572% to 6540%. And my TSP return is a paltry 3.72% for the year.:X

I bet your tax advisor and your real estate agent don't even know about this....

clester
09-19-2005, 10:51 PM
Pyriel,Can you expound a little on section 8. Do you have to have your property approved? if so, what are they looking for? etc.thanks

pyriel
09-19-2005, 11:06 PM
clester wrote:
Pyriel,Can you expound a little on section 8. Do you have to have your property approved? if so, what are they looking for? etc.thanks
Some of the most obvious ones they look for are the following:

1. smoke alarms. one per room and hallway.

2. GFI near water source: kitchen and bathroom

3. water heater; the drainage must be only few inches above the ground.

4. switches and outlets; ensure there no cracks in them

5. Must have power and water during inspection; here they want to see power and water bill before inspection just to be sure that power and water will be available before they inspect.

6. Lots of paperwork. Ensure that you photo copy your first one because you'll be seeing it again. must have checking account for direct deposit.

7. Make sure that there are no leaks when they turn the water on.

8. Make sure that all appliances and lights works when they turn them on.

9. Make sure all locks and doors are good before inspection.

10. Panel box ( i got hit on this, once) Ensure that all slots have a circuit breaker

11. Try to clean up the place before inspection and ensure that they are livable.

Tenant pays a co-payment that range from $25 to several hundred dollars depending on their income level. Section 8 will let you and the tenant sign a contract. There is nothing stopping you from attaching an addendum to that contract such as late payment fee and rules and regulations you might have. However, if your rules conflict with Section 8, their contract overrides yours. So, please read their contract carefully and then make an addendum to those that they missed.... Goodluck

clester
09-20-2005, 05:40 AM
Pyriel,Thanks. Is there a price range for a property you should look for? How do you know what the tenent can pay?Clester

Show-me
09-20-2005, 05:48 AM
Addendum's like not waterbeds, trash pick up, and no pets? Nothing like a leaking waterbed, garbage in the back yard, and cat urine. Arrgh! We had a tenant put a burn barrel in the back yard and they would put beer bottles, cans, and diapers in it. They don't burn! I.Q. test..............never mind.

pyriel
09-20-2005, 07:31 AM
GHURA (section 8) sets the parameter for rent. They control them. Here in our region a 2 bedroom is $869 max, 3 bedroom is $1228, 4 bedroom is $1500, 5 bedroom is $1700. However, if you have a similar rental and you are renting it lower than what they are paying, GHURA will only pay you the equivalent of your non section 8 tenant. GHURA also computes what tenants will pay. You have no control over that. My tenants copayment varies from $25 to $400. I think they compute it by income...

Showme is right... Make sure you have addendum to stop those from taking over your rental unit. Leave emotion out of it. When they do something that is against the reg and rule, write them a letter and send a copy to GHURA. Here on Guam, they have a long waiting list so they have no qualms on terminating those that do no comply... Good luck...

Show-me
09-20-2005, 08:10 AM
My 2 cent, minimal experience in rental properties. I am getting the impression that some are new to the idea of being a landlord. Make sure you inspect your property regularly. This is not a “set it and forget it” investment. Renters are not owners and they, in my experience, do not respect YOUR property. They will have other families living with them, illegal dogs, cats, drug paraphernalia, drinking binges, destructive to the property, filthy, parties, you name it. Impressions don’t cut it. My parents worst renters where...........a clean cut looking Baptist preacher and his family. Filthy undisciplined animals. My, my the tales I could tell.

My reason for this is not to scare but to enforce that regular inspection of YOUR property and addressing “problems” immediately, will save you money in the long run. Drive by or stop by and knock on the door and ask how thing are going. You can get a quick peek, without being invasive, on how they are keeping the house and yard. If the yard is a disaster chances are the inside is too. You are not allow to pop in when ever you want. Schedule annual or semi-annual “maintenance inspections” so that you can check out YOUR property. But remember it is THEIR HOME and you have to be careful how you approach THEIR HOME. Put that in you rental agreement that you will schedule walk thru inspection with proper notification. At least you will get the house tidied up once or twice a year. People are, for the most part, lazy and will not respect something that they did not labor for.

I know it sound horrible. You can have 100 good tenants but you always remember the 2 or 3 bad one’s.

Oaktree
04-05-2006, 08:51 AM
I am selling my rental property in Georgia, I have not lived in the house in the last 5 years, I left on military orders from Georgia to Germany in 1997, what am I looking at as far as taxes?, is there any way to defer some of the taxes? Any info on this would be of great help, Thanks

Gilligan
04-05-2006, 10:31 AM
I am selling my rental property in Georgia, I have not lived in the house in the last 5 years, I left on military orders from Georgia to Germany in 1997, what am I looking at as far as taxes?, is there any way to defer some of the taxes? Any info on this would be of great help, Thanks

Have you lived in this house at all? I believe if you lived in it at least two years, you can keep $250,000 profit, tax free, each for you and your spouse.

Pyriel & Ocean, does sound right to you?

Oaktree
04-06-2006, 01:03 AM
No we have not lived there, it has been rented since 1999. I am just trying to find out what part is taxable and can I defer some of it in any way?

Rod
04-06-2006, 01:44 AM
Basically, when you own an investment property, you will pay a capital gains tax on your resale profits at the time you sell. But, when you sell your personal residence, your gains come to you tax-free up to $250,000 ($500,000 for couples). As long as you've lived in the property for two of the previous five years, you don't have to report this profit to the IRS. What's really cool is you can repeat this process every two years pocketing the profits.:cool:


God Bless:)

Oaktree
04-07-2006, 12:56 AM
Basically, when you own an investment property, you will pay a capital gains tax on your resale profits at the time you sell. But, when you sell your personal residence, your gains come to you tax-free up to $250,000 ($500,000 for couples). As long as you've lived in the property for two of the previous five years, you don't have to report this profit to the IRS. What's really cool is you can repeat this process every two years pocketing the profits.:cool:


God Bless:)

Thanks Rod,
I had read somewhere that it was possible to roll over into other property or a IRA deferring the tax. But if one must pay the full tax at the time of sale now, I guess that is not the case. Does anyone know of a site where I could learn more?

Gilligan
04-07-2006, 11:43 AM
Pyriel probably has more experience in this than anyone else on this board. He is TDY right now, he might have some suggestions. An accountant would give you some guidance in tax shelters.

Dogdaddy
04-07-2006, 12:31 PM
Thanks Rod,
I had read somewhere that it was possible to roll over into other property or a IRA deferring the tax. But if one must pay the full tax at the time of sale now, I guess that is not the case. Does anyone know of a site where I could learn more?

Oaktree:
Look into a "Like Kind Exchange" (IRS Form 1031). Go here for simpler explanation than the IRS provides, then talk to a Tax Advisor:

http://www.wwlaw.com/1031.htm

Dogdaddy

pyriel
04-07-2006, 06:44 PM
No we have not lived there, it has been rented since 1999. I am just trying to find out what part is taxable and can I defer some of it in any way?

You have to pay tax when you sell the property since this is an investment property. Dogdaddy is right about the 1031 exchange where you can defer payment of taxes if you buy a like kind property. The problem here is that you just deferred paying taxes on it.

Many people who are retiring does it this way, Before they retire, they sell their home. They are not taxed because they lived there more than two years. They then move to their rental property and lived there for two years. After two years, they sell the rental property (now their own home) and they don't get hit with the capital gain tax.

Ok, Ok, Ok.... I lied.... You will still get hit with a capital gain tax due to the usage of depreciation when you had the property as rental. However, You just need to take out the depreciation from the original purchase of the rental property prior to moving in to make it your residence. That variable will be your basis for your capital gain tax. Here is an example, rental house purchase is 100k, rented it for 5 years and depreciated for 5k. You decide to move in to the house and sold it for 125k two years after. 5k/100k=5% You must pay 5% of the 25k profit once you sell the house after living in it for two years... Total $$ that is now going to get hit with tax is 1250. This is alot better than 25k. If you are in the 36% bracket, you will have to pay, 450.

Now, for the IRA issue, you can create a corporation (c or s is up to you). You can then become an employee of that corporation and your salary can be funneled through an IRA. I plan on doing this with all of my rental later so that I can continue to contribute even when I retire from my job (it is also a good way to make profit dissapear). The other way is to put your rental property under an IRA. Very complicated and I have never tried it so I will defer that for someone to explain.

I hope I didn't make this clear as mud...;-) Pyriel

ocean
04-11-2006, 06:46 AM
Now, for the IRA issue, you can create a corporation (c or s is up to you). You can then become an employee of that corporation and your salary can be funneled through an IRA. I plan on doing this with all of my rental later so that I can continue to contribute even when I retire from my job (it is also a good way to make profit dissapear). The other way is to put your rental property under an IRA. Very complicated and I have never tried it so I will defer that for someone to explain.

I hope I didn't make this clear as mud...;-) Pyriel

pyriel,

I would like to hear more about your thinking of creating a corporation. Are you planning to convert your existing rentals into the corporation owned? How complicate is that? Specically with the mortgage company, would they allow to do it.

I became a landlord last year. When I was trying to do the tax returns this year, I realized that I can't deduct the loss on rental income and depreciation because of my household income. I am thinking about taking my rentals into a form of S Corporation. I will have to do more research this area. But your thought will be appreciated.

Thanks

Ocean

pyriel
04-11-2006, 02:56 PM
pyriel,
I became a landlord last year. When I was trying to do the tax returns this year, I realized that I can't deduct the loss on rental income and depreciation because of my household income. I am thinking about taking my rentals into a form of S Corporation. I will have to do more research this area. But your thought will be appreciated.
Ocean
I created an S corporation for my apartment and use 1120s tax form (to include Schedule K-1) which becomes an addendum to my 1040 long. Gains or losses is inputted in 1040 at a section INCOME blocked 17. If it is a loss, this should lower down your income that you get from your W2 (those who do their taxes would know what I am talking about). Instead of an S or C corporation, I would advocate creating and LLC. It is almost the same as S corporation. The difference is capital gain tax. When you decide to sell the property later. Corporation gets hit with the highest capital gain tax vs. individual capital gain tax with LLC. For tax purposes, that is the only difference I can find between the two. For deduction purposes is concern, LLC is treated like a corporation. I didn't learn about LLC until later.

I am concern about you not being able to deduct the loss on your rental property and depreciation. By using Schedule C you should be able to use your rental loss and depreciation (and repairs, and property tax, and tax preparation expense, etc. etc. etc). You then take the loss (or gains) at a section INCOME blocked 12. Again this should lower down your income coming from your W2 before you hit the Adjusted Gross Income section.

Hmmm... Am i posting in the right place or this should go to Section under Taxes.
P

ocean
04-11-2006, 09:47 PM
I am concern about you not being able to deduct the loss on your rental property and depreciation. By using Schedule C you should be able to use your rental loss and depreciation (and repairs, and property tax, and tax preparation expense, etc. etc. etc). You then take the loss (or gains) at a section INCOME blocked 12. Again this should lower down your income coming from your W2 before you hit the Adjusted Gross Income section.

Hmmm... Am i posting in the right place or this should go to Section under Taxes.
P

pyriel,

Thanks for taking the time to explain it. When I was preparing this year tax returns a week ago, the Form that I think I could use for rental income was schedule E for rental profit or loss. And Form 8582 was used for property depreciation. According to the tax publicaton, all rental properties are considered as passive activity. That's why I used these Forms and followed their guidelines on limitation for deduction and that's where I found that I could not deduct any loss because of the Adjusted Gross Income limitation.

You mentioned that Schedule C can be used for loss and depreciaion. I noticed that the title of the Form is "Profit or Loss from Business - sole proprietorship". Am I allowed to use this Form instead of Schedule E even though I did not register as either Corporation or LLC? Your thought would be appreciated.

Ocean

pyriel
04-12-2006, 12:49 AM
pyriel,

Thanks for taking the time to explain it. When I was preparing this year tax returns a week ago, the Form that I think I could use for rental income was schedule E for rental profit or loss. And Form 8582 was used for property depreciation. According to the tax publicaton, all rental properties are considered as passive activity. That's why I used these Forms and followed their guidelines on limitation for deduction and that's where I found that I could not deduct any loss because of the Adjusted Gross Income limitation.

You mentioned that Schedule C can be used for loss and depreciaion. I noticed that the title of the Form is "Profit or Loss from Business - sole proprietorship". Am I allowed to use this Form instead of Schedule E even though I did not register as either Corporation or LLC? Your thought would be appreciated.

Ocean
Schedule E vs. Schedule C, that is the question... It is really a gray area on which one you would want to use. For Schedule E, IRS says, "To report real estate and royalty income (or loss) that is not subject to self-employment taxes. Schedule C "to report income or loss from a business you operated or a profession you practiced as a sole proprietor." Schedule E, Part I also state, "If you are in the business of renting personal property,use Schedule C or C-EZ." Which one should we follow?

My answer is use the form that will allow you the most deductions. Why? Because it is a gray area for those who are into real estate rental taking in passive income. Rental properties (not under LLC, S or C Corp) are considered sole proprietorship under the owner. Why is it called sole proprietorship? It is because there is one owner (you). I assume that you have a business license and I also assume that LLC, S or C Corp is not written on it. When you receive a business license to run your rental unit it becomes a business which now allows you to use Schedule C.

However, since rental income is a "rental real estate," then you should be able to use Schedule E as well. Why? Because this is really a proper form rental real estate. In fact, in Part I of Schedule E, you must list your rental property one at a time and produce the income of loss from them.

Here is the bottom line, many tax preparers will not know the difference between the two. IRS also wouldn't care as much as long as you are reporting your income or losses correctly. Both forms should give you the same amount of income or losses (and depreciation, and expenses) so I wouldn't worry about it... If you are not trying to cheat the government by evading taxes, the worst they can tell you is to redo your tax and switch one form to another form. 10 out of 10, that doesn't happen...
Pyriel

ocean
04-12-2006, 06:50 AM
Schedule E vs. Schedule C, that is the question... Schedule E, Part I also state, "If you are in the business of renting personal property,use Schedule C or C-EZ." Which one should we follow?

My answer is use the form that will allow you the most deductions. Pyriel

Pyriel,

You are the man! Your answer here probably will give me about $10K deduction on Federal tax. That transforms into about $3K saving of the federal tax that I will pay and it is legal. State tax would not make the difference because there is no deduction for business loss in NJ.

I took a quick glance on Schedule C, I found these Forms contain many similar reporting area. Only difference is that it did not indicate that there is a separate area for filing more than one property. I have 3 rental properties where 2 that I acquired last year and 1 that I converted to rental from my vacation home. I think I may need to add all the incomes and expenses from these properties in order to use Schedule C. If it is workable, then I will use Schedule C and I will investigate some more on these Forms.

This year I will file an extension on my returns so I will have another 4 months to prepare it.

Pyriel, I really appreciate the information that you'd given here. Aside from your TSP investment, I know you are on your path to your financial freedom in the real estate investment.

Ocean

ocean
04-15-2006, 07:19 PM
Pyriel,

After my little research, I found that for non registered business, the profit or loss will need to use Schedule E which I belong to this category. It means that the deduction of the loss for current year is based on the threshold of AGI and it can be carried over for future years. For now, I think I will use Schedule E on the safe side and write-off my loss when my household incomes reduce when both my wife and myself retire in about 8 years.

Thanks,
Ocean

pyriel
04-17-2006, 08:36 PM
Pyriel,

After my little research, I found that for non registered business, the profit or loss will need to use Schedule E which I belong to this category. It means that the deduction of the loss for current year is based on the threshold of AGI and it can be carried over for future years. For now, I think I will use Schedule E on the safe side and write-off my loss when my household incomes reduce when both my wife and myself retire in about 8 years.

Thanks,
Ocean
What is a non registered business? No business license? Are they paying on a cash basis? Hmmmm... I think that you are on the right track.... PM me for your answer and lets see what you can I can come up with. Something comes to mind right away but would not want to post it here...;-)