Need help on converting Primary to Rental

[Lee Krasulja]

Hey guys,

I'm trying to compile a list of things I need to consider/review with my accountant, financial planner and attorney. My wife and I have outgrown our home and feel that the time has come to find a bigger house. Unfortunately, our current home's value is less than what we paid and so we are deciding to purchase a new primary and convert our existing into a rental. Some of the questions I have or want input on are:

1. Don't have a lot of seasoned money for downpayment on new primary. Was thinking FHA for the low DP %. Anything major I should worry about with FHA? Looking at ~400K home. My frontend/backend ratios are reasonable. (nice way to say I have debt) :)

2. As mentioned above - don't have a lot for DP. Most likely will tap 401K. On a 400K home, that's ~15K withdrawal. Looking for ways to avoid the penalty. I read something about rolling into an IRA can get me out of the 10% penalty?

3. Current home switch to rental - to LLC or to not LLC? What about insurance? How much coverage, etc.?

Any advice or input is greatly appreciated.

Thanks.

-Lee

[Tim Delp]

I"m assuming you don't have FHA mortgage on your current home? If so you typically can not do another FHA mortgage.

I would suggest negotiating for the seller to pay your closing costs.

Not sure putting the property in LLC is necessary.

Also, I understand that you are outgrowing your current house but wonder why you are willing to strap yourself with such a large mortgage while at the same time having limited cash reserves? If you switch your current home to a rental and you have limited to no reserves how will you pay the mortgage when you have a renter that doesn't pay you for several months, damages your property while you go through an evication process, leaving you with a property that is not rentable and in need of more money to repair to bring it up to rentable condition.

Just think that if you are going to have a rental you should have make sure you have adequate accesible reserves for all the things that can happen with a rental property.