Recently, I purchased a couple properties in Idaho Falls, ID using 1031 funds and I am planning to short term rent those units. I have more money that I need to spend to avoid capital gains taxes and would like to purchase multiple units, only putting down 20-25%. The only problem is, my debt to income ratio is now skewed. My lender wants to see rental leases for proof of income but since I'm doing short term rentals, I don't have leases. So it seems to me that I'm either going to have to pay cash (and could probably only purchase 1 more unit now and refi that money out in 1 year) or figure out a way to partner with someone (and I could buy several units now). The unit I sold to get the 1031 funds was purchased before I was married and I never thought to add my wife to the title. So, my understanding is that my name is the only one that can be on the title of the units that I'm now purchasing with 1031 funds. Is that true? If so, is there a work around? Awhile back I was listening to a BP podcast (can't remember who the guest was or the title of the podcast) and they mentioned doing a 50-50 split in the contract where each party only owns 50% instead of both parties owning the entire property. It's been awhile and my memory is a bit foggy about the details of that precess but could that be a 1031 work around? Other thoughts on how to get around my debt to income ratio with a 1031 E? @Dave Foster , thoughts?
Thanks a ton,
If allowed, I still don’t think it would work. With both of you on the loan, you are Both responsible for the Full monthly payment,...not 1/2 to you and 1/2 to your wife. Ask your lender.
I had a recent purchase where the lender wanted to see a lease. I asked my regular property manager for a letter stating the amount that they would put the house on the market for as a rental, and submitted that to my lender.
Are you looking to purchase this next property with the leftover 1031 money? Did you put it down as a intended property to purchase during the first timeframe? Just double check that you can purchase it before you go through the trouble.
Hey @Riley Jordan , thanks for the shout out. You're gonna be slave to the lender and whatever terms they want to impose of course. But if you and your wife file a joint tax return then you are each the taxpayer for those properties regardless of what name is on deed. So if it works for you to take title to a couple of them in your name and your wife can get financing in her name that does not change the tax payer. So that would be fine from the 1031 perspective.
You could also take a partner and each of your take a tenant in common interest in the new property. As long as you have purchased at least a much real estate as you sold your partner can take title to any remaining %interest in their name.
Good catch by @Eric Mitchell , make sure you're still within your 45 day identification period.
@Riley Jordan Maybe talk with other lenders. Don't just take "no" for an answer. There are local lenders, credit unions, that do portfolio loans that understand rental property and may be more flexible in what they can do for you.
@Don Spafford Thanks for the advice! What lenders in IF do you use and like?
@Riley Jordan I prefer to use Mountain America Credit Union. I can PM you the specific lender contact if you'd like. But they do portfolio loans with as little as 10% down and no PMI and low interest. They will consider the expected rental revenue as your income which therefore can help your DTI since it increases the I. The closing process can at times be frustrating with them, but that is more with the underwriters but that happens at any bank. But if you can find a property that will cash flow well with 10 or 15% down, then you can extend the cash you have to buy more properties and your cash on cash return should be much better.
Zions Bank also does portfolio loans but does require the typical larger down payment. Idaho Central Credit Union can do 15% down but will still charge PMI, and therefore I don't think it is a portfolio loan but just an investor low down payment loan option.
@Don Spafford Yes, please PM me with the MACU lender's contact info. Thank you!