Converting primary residence to investment property

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Converting primary residence to investment property

Christopher McConnell
Member since 2021 · 3 posts · 2 votes


I am interested in using my current primary residence as my first step into building a rental portfolio as it is on a good trajectory of increasing value and I have a desire to relocate to another area. I am considering renting out my primary residence and purchasing a new primary residence, but I am unsure of the best path to do so or what challenges I may encounter.  The details are as follows:

  1. -Current residence purchased ~4 years ago for $300k with a conventional 30Y fixed
  2. -I have ~$280k left on my mortgage, paying $1900 per month
  3. -Current market value assessed at $440k
  4. -I estimate I can rent the property for $2500 a month

Current plan:

  1. -Complete refinance of current primary residence (Objective: obtain lower rate and monthly mortgage payment, remove PMI)
  2. -Move into a rental property as a temporary residence
  3. -Rent out my previous residence
  4. -Purchase and move into a new home 
  5. -Move rental property into an LLC with the intentions of continuing to add investment properties in the future

Areas of concern

  1. -When I complete my refinance, what do I need to look for in my new mortgage to ensure I don't have any issue converting that property from a primary residence to an investment property and then deeding it to an LLC?
  2. -When I apply for a mortgage on a new primary residence how will my rental property impact my approval? (I anticipate a net positive cash flow on the property but will likely not have more than a few months history of it)
  3. -I plan to be able to cover the down payment and closing costs for my new primary residence with available cash, but am considering taking cash our during my refinance, or use a heloc after the the refi to leave my cash reserves available for other investments.
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          Justin Phillips
          Lender · Phoenix, AZ · Member since 2018 · 440 posts · 256 votes
          5y

          Hi Christopher, congrats on taking your first steps on your REI Journey!
          I took the same route as you, converting my primary into my first rental. While it was still a primary, I ReFi'd into a 1st position HELOC. That allowed me to get the primary residence rate, and access up to 80% of my equity. Along with that, I no longer had a mandatory monthly minimum payment, just an interest only cost. It allowed me to really wait and find a well qualified/good fit tenant. It's been great, I'm cashflowing well and I can write a check from my line for an additional property purchase at any time.
          Your concerns: 
          1. In my experience, you shouldn't have much trouble moving to an LLC regardless of loan type.

          2. Depends on your lender/underwrite. A strong lease will definitely help, but without past rental history it may have any impact. 

          3. Definitely always good to have some money available as as safety net. Heloc is a great option because you only pay for the cash if you need it. 

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          • Justin Phillips
            Lender · Phoenix, AZ · Member since 2018 · 440 posts · 256 votes
            5y

            Hi Christopher, congrats on taking your first steps on your REI Journey!
            I took the same route as you, converting my primary into my first rental. While it was still a primary, I ReFi'd into a 1st position HELOC. That allowed me to get the primary residence rate, and access up to 80% of my equity. Along with that, I no longer had a mandatory monthly minimum payment, just an interest only cost. It allowed me to really wait and find a well qualified/good fit tenant. It's been great, I'm cashflowing well and I can write a check from my line for an additional property purchase at any time.
            Your concerns: 
            1. In my experience, you shouldn't have much trouble moving to an LLC regardless of loan type.

            2. Depends on your lender/underwrite. A strong lease will definitely help, but without past rental history it may have any impact. 

            3. Definitely always good to have some money available as as safety net. Heloc is a great option because you only pay for the cash if you need it. 

            1Reply
          • Michael Glist
            Lender · Denver, CO · Member since 2017 · 348 posts · 143 votes
            5y

            The only thing I would add to what Justin mentioned is that if you do a refinance as opposed to a HELOC is that part of refinancing your home as a primary residence is that you intend to occupy the residence as your primary residence for at least 12 months. So if you plan in taking the cash and immediately turning it into a rental there could be issues such as mortgage fraud or your lender calling your loan balance due in full due to you not occupying the residence.

            So I would say to look at both options side by side to see which one fits your needs and goals the best. 

            I hope this helps. 

            1Reply
          • Christopher McConnell
            OP
            Member since 2021 · 3 posts · 2 votes
            5y

            Thank you for the replies so far. This definitely gives me more to research as I am not as familiar with the pros and cons of a first position HELOC, but it sounds like that may be a good option for this situation.

            • Based on @Justin Phillips recommendation, is primary vs investment residence not a concern when doing a HELOC like it is with conventional?
            • If I am only interested in refinancing for the remaining loan amount is a HELOC still an option? Perhaps sharing my thinking on this will only disclose how unfamiliar I am with how a first lien HELOC works, but from the my understanding using the details of this scenario for a first position HELOC I assume I would be requesting a loan amount equal to what I owe or up to 80% of the value?
            • Will having a HELOC impact my approval for a conventional loan for my new primary residence?

            I am currently researching lenders in my area so hopefully I'll find someone else to pester with these basic questions. 

            0Reply
          • Justin Phillips
            Lender · Phoenix, AZ · Member since 2018 · 440 posts · 256 votes
            5y

            @Christopher McConnell
            1. With HELOCs, you'll typically get a slightly lower rate and a slightly higher max LTV on a primary vs investment. So if the property is currently your primary, set it as a primary.
            2. You'll want to set the credit line to the highest amount that you can, so you have access to as much equity as possible. For example: $400k Value with $250k outstanding, you'll want that credit line at the full 80% LTV at $320k. That way at close, you'll have $70k available on your credit line and a balance of $250K. 

            3. It will have an impact, but less of an impact than a conventional loan, because HELOCs are interested only. So it doesn't hit DTI as bad.

            Where are you located? I'm just licensed in CA/CO/AZ but the loan is available in every state. Let me know where you are, and if I have a contact, I can get you in touch. 

            0Reply
          • Christopher McConnell
            OP
            Member since 2021 · 3 posts · 2 votes
            5y

            @Justin Phillips

            Thank you. That all makes sense. I am in Charleston SC. 

            0Reply
          • Mike Dymski
            Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
            5y

            Sell and buy the property next door.  Your $140k gain on the sale of a primary residence is tax free and your new (replacement) property will have a $440k tax basis.  You loose the section 121 tax benefit on the sale of a primary residence if you don't live in it for at least 2 of the 5 years prior to sale (i.e. convert it to a long-term rental).

            0Reply
          • Santhi Mani
            Rental Property Investor · Los Angeles, CA · Member since 2017 · 30 posts · 9 votes
            5y
            Originally posted by @Michael Glist:

            The only thing I would add to what Justin mentioned is that if you do a refinance as opposed to a HELOC is that part of refinancing your home as a primary residence is that you intend to occupy the residence as your primary residence for at least 12 months. So if you plan in taking the cash and immediately turning it into a rental there could be issues such as mortgage fraud or your lender calling your loan balance due in full due to you not occupying the residence.

            =============================================================

            Question:


            How about HELOC loan on the primary residence taken 12 months prior to making it an investment property still holds good or do we need to inform the bank and ask them to refinance at a higher rate?

            0Reply
          • Santhi Mani
            Rental Property Investor · Los Angeles, CA · Member since 2017 · 30 posts · 9 votes
            5y

            How about HELOC loan on the primary residence taken 12 months prior to making it an investment property? Does it still holds good or do we need to inform the bank and ask them to refinance at a higher rate?

            0Reply
          • Michael Glist
            Lender · Denver, CO · Member since 2017 · 348 posts · 143 votes
            5y
            Originally posted by @Santhi Mani:

            How about HELOC loan on the primary residence taken 12 months prior to making it an investment property? Does it still holds good or do we need to inform the bank and ask them to refinance at a higher rate?

            That I am not sure of. I have never been at a bank or company that offers HELOCs so I am not sure of all of the requirements or guidelines that come along with them. I would say your best bet would be to contact a bank or a few banks and ask them if there are any requirements regarding occupancy. I would say phrase it will a longer term as to make it not seem like you are planning on moving immediately after to see what they say. Maybe tell them you plan on moving within the next 5 years or so and see what they say. 

            1Reply
          • Santhi Mani
            Rental Property Investor · Los Angeles, CA · Member since 2017 · 30 posts · 9 votes
            5y

            Thank you @Michael Glist. 

            0Reply
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