Ideas for Turning Primary Home into first Rental?

Question

Hi, I am a new member and want to be investor. I will need to be upsizing shortly as my wife and I will be having her mother and grandmother move in with us in the next 3 months or so. We have good equity in our current 4 bedroom, 2 bath house in the city we live in and are considering turning it into our first rental property. It will need a few minor fix ups as we want to keep it in great condition - new kitchen cabinets, fixtures, redo one bathroom and carpet in living/dining room and hallway. Rest of house is good, but could use new windows. Any concerns with the current mortgage holder in doing a deal like this from any of you pleasantly experienced investors? Any advice?

Thanks - Randy & Linda R

Steve Vaughan · Answer

Taxes are our largest expense over our lifetimes.  I would weigh my 'significant equity' and at least consider selling for a tax-free gain.  Doesn't happen very often!

I do not over-improve rentals.  To keep a property in 'great condition for years to come', don't rent it out.  Will you be ok to drive by your home and see the grass is dead, the window screens gone and torn and a bunch of crap in the yard?  If the answer is no, just get a rental you're not emotionally attached to.

There are good renters out there, and a $240k (gulp, flinch) rental house will usually appeal to a higher class of tenants.  All is not sunshine and roses in the LL business is all I'm saying @Randy Rettinger

Arlan Potter · Answer

@Randy Rettinger

I don't know the area, but I would imagine that:

3 - $80,000 houses would rent for close to $1000 each.

$3000 > 1800

That is my game anyway. Cheap houses make me a better overall return.

Randy Rettinger · Answer

Hopefully $1,800-$1,900/month. Payments are $1,100.

Arlan Potter · Answer

@Randy Rettinger

What will your house rent for?

4 cheap rentals will make a lot better return for you investment.

Randy Rettinger · Answer

Thank you!  That makes great sense and helps me greatly in making progress toward a decision in what to do toward a move in the right direction.  Timing is everything and it always scares me to sell and buy anyway and it worked out great when I bought the house.  The idea of hanging on to it for an investment purpose when I already have it and want to head into the investment property business makes sense, but only if I can do it legally, feasibly and financially efficiently.  And...if it will rent.  That is the next question for the local market experts.

Appreciate your wisdom.

Randy

Upen Patel · Answer

When you get the new loan for your new primary residence, you will sign an affidavit that you will occupy it for at least 1 yr (you can always sell it). Also, since your current house will not already be rented, so you would be qualified on the basis of being able to afford both the houses and the requirement of having enough cash reserves.

So, as long as you do occupy the new house in a timely manner then it should be all good. If you turn around and rented the new house and stayed in the current house, then it would be mortgage fraud. If the lender found out they would recall the loan and potentially prosecute you.

There is always the possibility of someone doing what they should not and lying about it. If lenders lend based on the hypothetical possibility they there would be no loans.

Hope this answers your questions and concerns.

Upen Patel, Mortgage Banker

Federal NMLS# 1374243

Randy Rettinger · Answer

So, I expect my current primary is worth about $230K to $240K and I owe just under $190K.  I am thinking I would put about $15K into this house and it would be in perfect condition for years to come.  Wouldn't it be harder to round up more cheap rentals to get better income and it would take far more work to get them rental ready for the work it would take to manage and maintain them?

Randy Rettinger · Answer

As a lender, would you not even consider it if I were going to convert it to a rental immediately after the purchase of a new primary residence?  In my case I would think I need to stay in my current house, make an offer on a new primary and as soon as I close, I would make every effort to move, and do my fix-ups within 3-4 weeks and have the current primary ready to rent.  Hopefully I would be successful at renting it right away, but I do have some reserve funds set back to cover payments on it for a few months in case it wouldn't rent for the first 2-4 months.

Arlan Potter · Answer

I wouldnt. Too much money in one house. Sell it and buy four cheap rentals.