Primary Home convert to Investment property

8 Replies

Hello

I own primary home and am thinking buying new primary home soon. Once I close, new primary home, I will keep my current primary home as rental. (Location: East bay in CA)

Question here: To have some cash cushion for new closing (I have 20% downpayment but in case, I want to have some reserve), I am in middle of processing to have HELOC (as primary home HELOC, not investment HELOC) on my current primary home. Did anyone have similar situation that primary home is converted to investment property with HELOC opened? My plan is once I open HELOC, I will either use the money to buy another investment. And as long as I payback HELOC interest/balance monthly base, I don't need to report to Bank that my primary home is converted to Investment property? This is somewhat gray area that I am not sure what is the best approach here. Thank you in advance for your advice here.

@Kevin Kim

I've done that and had real no problems.

I've got my HELOC on my primary residence, and then went looking for foreclosures. Found one and successfully bid for it at an auction. Seller was the foreclosing bank. Went to get an NOO mortgage by the foreclosing bank which offered 90% financing. I was planning to use the HELOC for the down payment but the bank turned me down saying the down payment must be seasoned funds of at least 6 months. Fortunately for us, my wife handled her mom's finances, had large joint account with her name for over 10 years, so the mortgage was approved based on that. By that's only for loan application purposes. I used the HELOC funds anyway as the seasoned funds are all tied up charging penalties for withdrawal.

So that one thing you'll have to watch out for. Some lenders need to see seasoned funds. 

As to your main question, if I planned to move to the house I bought, that would have been OK too with the foreclosing bank. The only minor problem was I refinanced the house I moved from a few months before, then renting it out, and back then they require residency of 2 years when you get an OO mortgage but it's currently it's only one year. I did move in less than the 2 years as the house I bought was so much roomier taking a minor risk with the refinancing bank finding out for the house I moved from.

I am interested in doing the same! My family is considering a new primary residence and want to convert current home into a rental if the numbers look right. Before we convert there are some expensive improvements I'd like to make like new roof and replace an aging outdoor patio cover. We have roughly 40% equity (put 25% down two years ago and has appreciated ~25% since then), so there is plenty of room there for a HELOC. I would prefer to pay for these improvements with the HELOC and let the future renters pay it off. We aren't too concerned with cash flow from the property at this stage (both have W2's now) so would be happy to dump everything over PITI each month into paying that off.

When opening up a HELOC, is there typically language in the contract that you have to live in the residence (or perhaps for a certain period like conventional loans on primaries for 12 months)? How will the terms differ for a primary vs investment? Higher interest rate, lower combined loan to value (CLTV), higher credit score requirement, etc.?

Thanks!

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@Kevin Kim Outside of the lender piece, one thing to consider is the homestead/non-homestead tax situation in your current municipality. At least in Michigan, when you move, you longer have the homestead tax exemption that allows you to pay cheaper taxes (on your original primary). Some don't report it; however, in reality, your tax rate will increase. 

This won't affect your analysis as far as capital to go get another rental - Just something to think about as you are running numbers on your first one. 

@Kevin Kim I opened a HELOC recently on my primary residence and I asked them specifically about this, and the guy looked at me like I was weird and said they don't care about that. He even said when the 10-year draw period is over there should be no problem renewing it if I want.

Make sure your current primary doesn’t have a bunch of tax free appreciation that you are changing to taxable by making it a rental. You don’t want to create a 30 or 40k tax bill hole you need to dig your way out of. 

Thanks All. I don't think there is any tax implication that cause the tax bill hole but i will double check. My concern was any HELOC regulation etc but it looks like there is not much on HELOC restriction.

There’s no tax implication if it hasn’t gone up in value since you bought it. Or at least hasn’t gone up more than what it would cost to sell. (Otherwise you’re making that appreciation taxable by converting your primary to a rental.) But in that case you own in the one bad market in America and maybe it’s time to sell anyway.   especially since you can’t even 1031 yourself away from the long taxing arm of California. This would be your one tax free chance.