Converting Primary Residence to Rental Property

2 Replies

Here's our current situation:

1. Have a single-family home in Florida, purchased in 2005 for 202k

2. Travel for business and don't currently use as a primary residence

3. Planning to invest funds into the home in order to increase value, rent the property and refinance to today's interest rates. 

4. Would refinance for only the remaining 180k on the note. The current estimated value of the house from Redfin & BofA is between 180k to 200k

6. If there is any equity, we'd like to use HELOC in conjunction with existing cash to purchase a new primary residence or multi-family that we can both live in and collect cash flow from

Questions:

1. What would be the best method to assess the current value of the house? Hire appraiser or ask bank?

2. Since we're planning to renovate 2 small (6 x 11) bathrooms, paint and new minor kitchen upgrades, does it make sense to use existing cash and credit to fund updates or see if there's any existing equity to fund the renovations?

3. I have an existing LLC, would it make sense to transfer the personal property into the LLC as an Asset to begin the investment portfolio through a business entity and reduce personal liability and being over-leveraged?

4. Since this home is still listed as our primary residence, would it be possible for us to use 203k loan to renovate before using as investment

5. Anything else we should be considering?

Have a great weekend 

- Emilio
 

Lots to unpack here. 

1)You may have trouble forcing a value add with a bathroom reno. At the end of the day it sounds like it won't appraise for much more than 200K. I'd check what houses on the street and neighborhood that are similar to yours, what are they selling for. 

2)I don't think you can use 203K loans for rentals. You have to live in the home for a period of time (maybe a year?)

3)You can rerecord the deed with your county for a fee and put it in the LLC, but it might trigger the due on sale clause and the lender could call the note due. Unlikely but possible. if you refi you can get a loan in your LLC's name but the bank likely will give you a poorer interest rate.

4)The bank will send an appraiser to your house when you refi. If you fire an appraiser directly the bank isn't likely going to use one that wasn't ordered independently through their loan origination process.

5)HELOCs are easier to get without an appraiser but talk to your bank.

6)Keep in mind that iff you use your primary residence as a rental. Once it is used as a rental for more than 3 of the last five years you will be subject to long term capital gains and loose the homestead capital gains rule. This is a big deal. I wouldn't want to give up my free capital gains so I wouldn't use it as rental for more than 3 out of the last five years. Said differently you need to live in it for 2 out of the last 5 to be exempt from paying capital gains. If married 500K of gains could be tax free.

7)If the home is work 180,000 what will it rent for? Can you get 1800 a month in rents? If not, I'd consider selling it and buying something with better rental numbers. Very few primary residences make good rental homes since people don't typically buy them with the intent to rent them in the future and don't look at the numbers in that critical light.

Good luck, Andrew

Hello Andrew. Thank you for your response. We greatly appreciate it. 

Our immediate goal is to have a tenant pay the mortgage, set aside those funds to secure the 20% we'd need for a multi-family investment property. 

Also, with it rented, we shouldn't be restricted from getting a new loan by the bank still considering our current address as a primary residence.

But, great call on the tax implications, due on sale and considerations to sell and re-invest.

In order to sell, we'd really want to make sure we have enough equity to at least sell and not owe.

Thanks,

Emilio 

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