Wondering about keeping primary residence for rental property

8 Replies

Hey everyone. I’m in the very beginning stage of my real estate journey and was wondering about getting started by keeping my current primary residence as a rental instead of selling. My family and I are looking to move soon (within the next year or two) and was wondering if I did keep it, how would that effect us with a purchase of a new home through the lenders eyes. How do they look at balancing two mortgages, ect??? Thanks in advance for any and all advice.

@Luke Angstadt you should be fine as long as you have an excellent lender. You won't be able to pull this off easily walking into one of the big banks, but if you have a great lender who works with investors you should be fine. If you have a good local realtor, make sure you check with them for the lending piece. I work with a mortgage broker for this very reason. We just pulled this same scenario off for a family in Berwyn, IL who was looking to sell a home while buying a new one at the same time. The market is so hot that we did not have the luxury of waiting till their home was under contract to move on the new home. We got it done, but it was really the lender that made it happen. 

@Thomas S. I’m learning that too! For me, the CapEx made a difference due to having replaced the roof, HVAC, flooring, etc. based on my window of sale, I knew CapEx wouldn’t be eating into my cash flow plus I was able to live in a fixed up property for awhile. Timing also helped make a decision because the foreclosed property I bought in 2009 hadn’t rebounded yet in 2011. Near zero vacancy too.

@Luke Angstadt

@Thomas S. make a very good point here. It is very common for newbies to want to do this to get a start as landlords -- hold on to their starter home as an investment and rent it out while moving to a (usually nicer) second home. The biggest problem is that you and your wife will maintain an emotional connection to the first home, which is usually not at all set up as a rental, and when you see the not-so-nice things that tenants will do to it, it will affect you. Granted, this can be a learning experience about how to harden rentals properly, but it often creates all kinds of nostalgic sentiments that can flare up into conflicts with the tenants.

The usual scenario is that the tenants move in, live as tenants do, and the newbie landlords go back in and find delicate stuff, or meaningful stuff, or stuff that they didn't even know was meaningful to them damaged or painted over or disrespected in some way, and then the newbie landlords get in this forum and moan about how tenants just don't respect their landlord's property, and they get ten other newbies commiserating and telling them that yes, yes, yes, they're right, and their tenants are bad, bad, bad...and of course this can lead to all kinds of poor decisions.

What is the value, amount of equity and market rent for the home in your area. These are the numbers that dictate whether it is a investment property or not.

Condition of the home is a secondary issue. CapEX are very real and will be present regardless. Nothing lasts for ever, tenants can destroy anything.

@Thomas S. Why is it rare? I would think it ideal. Older note with low o/o interest rate...so lower piti vs a new buy, loan already purchased so free money with no down, nice area or would not have been purchased in first place, know the property so no surprises. But yes, he should run the numbers. He may find selling at a cost of 8% and new loan at a couple grand and 20% down might still be a better choice. But if you read the post, The op is just wondering if he will be able to buy another house while keeping his first as a rental.

One HUGE downside to keeping a primary residence as a rental is if you have significant capital gains then you could be forgoing your exception of 250k (single) or 500k (married) on a residence that has been your primary 2 of the last 5 years.  You must factor that in.     From my experience, you would not buy that property as a rental, so it is inertia, if you have capital gains, take them tax free, then go buy a real rental (even better a multi-unit, remember up to 4 units is confirming and will qualify for the SAME kind of mortgage as a house (assuming your living in one of them for some amount of time.)