% Down payment needed

[kegjeg]

What is the lowest down payment that I can use to purchase a 2 or 3 unit rental for? It would be non owner occupied. I have a credit score nearing 800 and a ton of equity in my primary, but am now looking towards a mortgage on the rental instead of useing the equity due to the tax ramifications.

[Investment Loans]

You may be able to find a local bank where the property is located  to fund the entire purchase if you are buying below market value.

If not, there's always the possibility of using a hard money lender.  If you get in with no money down using this program you'd still have to refi into conventional terms since hmls are short term.  Obviously this cost a bit more but doesn't drai your resources.

Personally, if you were my client, I'd explore the option of getting a potential heloc on your primary or business/working line of credit.  Use this to fund the entire purchase.  Your cost would be limited since no initial loan.   Upon meeting the qualifications you could then refi with a conventional loan.  There are still no seasoning cash out refinances available.  LTV is determined by appraisal value. This means if you bought below market value you get your purchase $ back (possibly more) and the ltv may be quite low.

You'll want to work with a mortgage consultant that specializes in investment loan like these.

I'd need more info to really determine what your best options are.

[Dave T]

What is the lowest down payment that I can use to purchase a 2 or 3 unit rental for? It would be non owner occupied. I have a credit score nearing 800 and a ton of equity in my primary, but am now looking towards a mortgage on the rental instead of useing the equity due to the tax ramifications.

Could you please explain what the "tax ramifications" are?  I did not think there would be any for the scenario you describe.

[Deal Hunter]

If you borrow or cash out the equity in your primary to use as a down payment, you won't be taxed on the amount you borrow. 

[kegjeg]

What I meant is that I have been told that I can't write off the interest paid on the equity loan on schedule E, that I would have to write it off on my schedule A. That is why I am looking at a conventional mortgage. I would like to use the equity to make the purchase because the rates are better and I am limiting my liability by not purchasing anything that I cant affford to pay for even if the rent is not coming in( hopefully this does not happen), But if i can't claim the interest on schedule E, it is not worth it to me. I have also been told in the last 24 hours that I can claim the interest. I guess that I really need to speak to a CPA to clear this up before I move ahead any further.

[Investment Loans]

Use equity form a working/business line of credit or home equity to purchase.  You won't be able to right off interest but you can refinance the investment property with conventional terms.  This would put money back towards the line, allow you to right off the interest, and gets you in with very little out of pocket.  (This would only work if you are buying below market value).

[jbaldwin]

Instead of taking cash out of the property why not just cross collateralize the equity.  You can still capture the interest deduction and then after a few years you can have the equity released and you can use it again for something else.  Just an idea.

[kegjeg]

I think that I understand the concept of cross-colateralization, but how would that help me in my situation. Can you show me a hypothetical situation? Thanks, Nate

[christopher w]

Cross-collateralization is probably a bit more complicated than you may want for a transaction like this. There are national lenders who offer it, but local banks are the place to go for a product like that. They do it quickly and don't murder you on the documentation. Also, I never said you could not write off interest on a schedule E in my response to your posting regarding where you write off rental property interest. All I said was that you can't put it on the schedule A. I have a rental property and I receive a deduction for my mortgage interest on the schedule E.

If you take out a HELOC on your primary residence you can claim that interest on the schedule A even if you are using it to buy rental property. However once you do a cash-out refi on the rental to pay back the HELOC you would then move the property to your schedule E. Hope this helps.

[Dave T]

There is a lot of misinformation flying around about mortgage interest deductability.  As a general rule, mortgage interest follows the asset purchased with the loan proceeds.  If home equity loan proceeds are used for a business purpose, the mortgage interest is deducted on Schedule C or the approbriate business tax return form as business interest.  If home equity loan proceeds are used to purchase a rental property, then the mortgage interest is expensed against rental income on Schedule E.  If the home equity loan proceeds are used for any other purpose, the interest is deducted on Schedule A. 

For a concise summary of where to deduct mortgage interest, refer to Table 2, IRS Pub 936