What Are Capital Gains Tax, Short-Term Capital Gains Tax and Taxes on Rental Property Income?

Person doing taxes, rental property taxes, investment lendingIf you are a new investor, you will quickly learn that buying investment properties adds an extra layer of complexity when the time comes to file taxes. The IRS taxes all capital gains but has different approaches for long-term and short-term capital gains. Long-term capital gains are the returns earned from a property that was held for more than one year and sold for more than its purchase price. The taxes are determined by a unique tax bracket that is lower than the ordinary tax rates that apply to income. A capital gain rate of 15% applies if your taxable income is $78,750 or more but less than $434,550 for single filers; $488,850 for married filing jointly or qualifying widow(er); $461,700 for head of household, or $244,425 for married filing separately.

In contrast, short-term capital gains are taxed as though they are ordinary income. Because income tax rates are higher than those of long-term gains, it can be a good idea to hold on to a property for a year prior to selling if your transaction gains cause your income to jump into a higher tax bracket. While it is possible to turn higher profits by cashing in and reinvesting, the tax policy in place incentivizes individuals to hold their properties for a year or longer.

Regarding rental property income, your earnings are taxed as ordinary income. However, there are an array of allowable expense deductions that will lower your tax bill. These include:

  1. maintenance expenses
  2. repairs
  3. mortgage interest
  4. insurance costs
  5. advertising costs for the property
  6. payments to property manager
  7. HOA or condo fees
  8. property taxes
  9. services you pay for, such as utilities
  10. legal and other professional fees related to owning the property
  11. depreciation

It is worth underscoring the positive impact that depreciation deduction can have on your taxable rental income, which can often bring the property’s income down to zero for tax purposes. This is in fact one of the best advantages of investing in rental properties.

Do you want to know how else you can benefit from real estate investing? Contact the RLG team today to schedule some time to discuss how RLG’s vast experience in the sector can help guide you to success

The 203(k) FHA Loan: Adding on Your Rehab Costs to Your Loan

5 little red houses, The 203(k) FHA Loan: Adding on Your Rehab Costs to Your LoanAn 203(k) FHA Loan, sometimes called a Rehab loan or FHA Construction Loan, allows you to buy or refinance a home that needs work. With this FHA loan, you can include in your mortgage the dollar value needed to repair or upgrade the home. Your loan will then cover the purchase or refinance price and the cost of upgrades, allowing you to pay for the renovations over time as you pay down the mortgage. This is a superb financing tool that may allow you to get into an area where turn-key homes are more expensive. It is important to remember that in order for a lender to approve financing, the home must meet certain safety and livability standards. As 203(k) loans are insured by the Federal Housing Administration, lenders may be able to offer more lenient qualification requirements than other type of renovation loans.

The process for an FHA 203(k) loan is quite similar to that of regular home buying, but with a few extra steps:

  1. Apply with a 203(k) approved lender
  2. Get approval for the loan
  3. Select a contractor for your renovation project
  4. Get estimates for the project
  5. Close the loan
  6. Complete the repairs
  7. Move into your new home

Are you interested in a 203(k) loan or would you like more information? RLG has the tools and resources at its disposal to get you on your way. Call us today to experience firsthand the dedicated, personalized customer service and undivided attention that RLG has to offer!

What is ARV in Investment Lending?

Key on wood background, FHA loan

FHA Loan, Key on wood background, ARV, Investment LendingThe ARV, or After Repair Value, is a figure used in the BRRR Method (Buy, Rehab, Rent, Refi) to determine the difference between the as-is price of the home and the value of the property after repairs. It is a critical number for real estate investors as loans are granted based on the loan-to-value derived from the ARV.

The after-repair value formula is:

ARV = Property’s Current Value + Value of Renovations

To calculate the property’s current value, it is important to enlist the help of a professional appraiser as they have the expertise needed to identify any issues and “quirks” that could affect the property’s value.

Once you have the property’s value pinned down, you will need to estimate the costs of renovations. Keep in mind that the costs incurred to flip the house must be less than the value of the renovation so your investment will see positive returns. Here are some factors to consider:

  1. Size of space

Remodeling a guest bathroom will almost certainly be less costly than larger areas such as the master bedroom or the kitchen. Full kitchen remodeling projects are likely to run at least $50,000. To cut back on expenses, you may want to consider a partial renovation and avoid major structural changes such as knocking down walls and rearranging the layout.

  1. Property condition

Older houses will often require more maintenance and have underlying issues. An inspection report is key in ensuring that your fixer-upper does not turn out to be a money pit.

  1. Design and Materials

When it comes to pricing, cabinetry, flooring, and windows run the gamut. Choose finished materials that fit into your budget.

  1. Contractor

Get estimates from at least three contractors to zero in on an offer that combines both quality and fair price. Asking for specifics about the scope of work, such as itemized list of repairs, is a good idea.

When determining the maximum price you should consider paying for a property, many real estate investors abide by the 70% rule. Imagine the ARV for your property is $100,000, and it needs $25,000 in repairs, then the most you should pay for it is $45,000. Lenders often times rely on the ARV to determine how much money you can borrow.

Types of Commercial Loans

Administrator business man financial inspector and secretary making report, calculating balance. Internal Revenue Service checking document. Audit concept, conventional loans, investment loans, investment lending

Administrator business man financial inspector and secretary making report, calculating balance. Internal Revenue Service checking document. Audit concept, conventional loans, investment loans, investment lending

There are 5 primary types of commercial real estate loans that you can tap into: conventional loans, bridge loans, SBA loans, hard money loans, and owner financing.

  1. Conventional: Most banks and financial institutions offer conventional loans. It typically consists of a fixed-rate mortgage used by investor to buy an existing, occupied property.
  2. Bridge: A bridge loan is short-term source of capital made available for investors looking to service a debt until they can complete a flip and refinance the property or to pay out a balloon payment, for example.
  3. Hard Money: Hard money loans are an alternative form of capital provided by private individuals or companies. These short-term loans are secured by using commercial real estate as collateral.
  4. SBA: SBA loans can be broken down in two: SBA 7(a) and SBA 504. These loans are backed by the Small Business Administration (SBA), thereby their names. The SBA 7(a) differs from SBA 504 in that it offers more flexibility with how you can use your funds. Under a SBA 7(a), borrower can secure up to $5 million, whereas the SBA 504 program has no maximum loan amount.
  5. Owner Financing: owner-financed deals are done outside of financial institutions, where the seller acts as the lender in the purchase of their property.

Are you interested in a commercial loan? Call us today and we will be happy to discuss in more detail how to set you up with an investment property loan that will fit your growth needs

The FHA Loan: Putting as Little as 3.5% Down

FHA Loan, investment lending

FHA Loan, investment lending

FHA loans are mortgages insured by the Federal Housing Administration (FHA), which can be issued by any FHA-approved lender in the United States. Unlike conventional loans, FHA loans are government-backed, which protects lenders against defaults. This in turn allows lenders to offer prospective borrowers more competitive rates.

The biggest obstacle to most new homebuyers is the feared down payment. But did you know that FHA loans allow down payments as small as 3.5%?

On a $250,000 home, a 3.5% down payment translates to $8,750 – quite a contrast to a traditional 20% down payment of $50,000.

To qualify for a 3.5% down payment with a FHA loan, your credit score needs to be at least 580. If your score is lower than this, you will need to put at least 10% down.

Contact RLG today to see if you qualify!

The Perfect Loan Does Exist

Hand of Business people calculating interest, taxes and profits to invest in real estate and home buying

Almost all of us old enough to buy a home remember the 2008 subprime mortgage crisis that sent the country into a recession. In the aftermath of the crisis, a number of measures were taken to bring more transparency, reduce the likelihood of future financial woes, and end taxpayer bailouts. These enhanced protection standards led banks and lending institutions to further tighten underwriting guidelines.

As Fannie Mae and Freddie Mac began applying more scrutiny to mortgage loans they had purchased, more lenders were forced to buy back the mortgages at face value and absorb any losses. Large financial institutions suffered billions of dollars of losses repurchasing these loans from Fannie and Freddie. Smaller mortgage originators then began to absorb grave losses as larger financial institutions required them to follow suit. This created a snowball effect and shuttered many small businesses. To counter the threat of loan repurchases and stay afloat, the surviving small and medium-sized mortgage originators set out more stringent underwriting procedures and guidelines.

These days, the perfect loan is not one that involves large sums, an irreproachable credit score, or a hefty down payment, but rather one that meets the credit underwriting standards for the type of loan you are applying for and one that you can corroborate with documents. Every single aspect of your financial life has to be checked, verified, and reviewed once more before approval. What underwriters look for are a history of consistent payments and a paper trail to back that up. In this way, lenders can detect loan defects at origination and minimize the risk of a buyback loss.

The lending process typically starts with the prequalification. A loan prequalification is an estimate for credit given by a lender based on information provided by a borrower. At this critical stage, the mortgage planner will request information over the phone or through an online form about things such as employment, income, assets, and credit score. They may also obtain soft credit inquiries, which do not affect an individual’s credit score. At Ridge Lending Group, we complete 90 percent of our due diligence on the front end of the transaction in the prequalification phase.

For the final approval, the borrower will need to provide all the supporting documentation to the lender. The mortgage underwriter is tasked with validating the information therein and approving your loan. Nowadays, most mortgages are approved by automated underwriting engines such as Desktop Underwriter, and the automated system will indicate what documents are still necessary to verify the inputs. Once the mortgage underwriter collects those and other documents they may require, the loan file is then re-submitted to Desktop Underwriter.

As you can see, the perfect loan boils down to proof. While the day is yet to come when the process will be far more streamlined, you will want to produce every required paper in full. If a document includes multiple pages, such as bank statements, make sure to include every page of it, even ones marked “intentionally left blank.” Do not hesitate to ask your loan officer for precise instructions on how and where to submit the information. When a loan application becomes a source of frustration, it is often due to miscommunication.

For helpful tips on getting started in real estate investing, subscribe to our YouTube channel. You can also contact us regarding commercial properties by calling 855.747.4343 or sending an email to info@ridgelendinggroup.com. Also, visit our website for any additional questions related to investment property funding.