First time posting and need some advice on this topic:
Currently, my parents (retired) own a house in Phoenix, AZ area that is free and clear that I am estimating worth $300k-$350k. I also own a free and clear home in AZ that is free and clear, that I estimate is worth $400-450k.
My parents are getting older and I would like to buy a new home that can accommodate both my family and parents. With today’s market and to get a home large enough to meet all our needs, we would like to buy a house that is around $900k home.
Initially, we were going to sell both houses to buy the new home and have little mortgage, but then I realize this seemed risky to waste two homes’ equity to only get one expensive home that may crash depending on the market. I then thought about just renting out our homes and become landlords.
We can get a $900k Jumbo VA loan and pay 10% down and get around 2.25% rate. We are estimating the mortgage will be around $3600/month (including escrow).
The best option, I can think of is renting out both homes. I think we can easily get $1500/month from parents home and $2000/month for my home. The rental money basically pays for the new home and we can easily pay for all the bills and the mortgage the difference. My husband and I have enough income ($200k/year) to cover the mortgage, even if we don’t have renters.
1. Is this a good idea to do this? Are there other better options to deal with this situation?
2. If we rent out the homes, should we form different trust or LLC for each home? Maybe Two separate LLC for the rental homes and make trusts to manage the LLC? How do we protect ourselves from any legal lawsuits?
3. If we rent out the homes, how are we impacted by taxes? If we are using rental income to pay for one primary income, how do we do any write-offs for the rentals? I have little to no knowledge on rental taxes.
Any help and advice for theses questions will be greatly appreciated. Thank you for your time!
Free and clear houses are huge targets for lawsuit-happy lawyers. I'd avoid that.
Expensive properties rarely generate good cash flow when properly leveraged.
If I were in your shoes, I'd sell both houses. Then I would buy the house I want to live in with a mortgage, and then buy a bunch of rent properties with the funds left over. Given the equity you have, you should be generating much more cash flow from your rent properties than the mortgage on the home you live in. This strategy decreases your risk exposure, improves your cash flow, and leverages your existing equity to own significantly more assets.
@Mel Craig not all homes are good rentals. You need to evaluate whether each home is a good rental and what is market rent before you decide. Put down all the expenses you would pay (taxes , any water?). Keep in mind if you net $3500 you need to pay taxes for both houses and repairs out of that. Any major repairs coming up? e.g. roofs? Your best bet is to analyze them both as rentals.
Then I would also get a market analysis to see what you would yield on each home by sale. Do your parents want to move in with you or do they prefer their own space. Are the siblings on board? After you have that info sit down and discuss it. If you do rent them do so in a multimember LLC. If you sell you can decide how you will manage the proceeds. If you will co-mingle and use for housing or separate. Then buy property with rentals in mind. It is not a straightforward question based on whether they are free and clear, it is more about if they are good rentals and if they yield your desired income/result.