Refinance then rental

8 Replies

Hello BP community,

I am a homeowner who is thinking about putting my home on the rental market for the first time. I bought my house a little over a year ago and at the time the interest rate I got on the house was in the high 4's. Since the interest rates have gone down significantly I am starting the process of refinancing my home. Once the refinance goes through, that's when I am planning on putting the house on the market as a rental. I am not moving the house over to a LLC, I plan on getting an umbrella policy that would cover me in case something did happen.

I would like to know if my refinance lender would see it as a major problem if I put it as a rental so quickly after I refinanced (especially after saying that this is my primary residence, which currently it is).  Would they even find out? I'm going to change my homeowners insurance to a landlord insurance policy, is that one way that the lender could possibly find out? If they do find out, do they even care? Thank you in advance for the help and suggestions!! 

The easiest and best thing to do in this scenario would be to ask your lender.  If they won't be able to provide you with the solution you are looking for, ask another.  Try your smaller banks in your region and develop a relationship with one willing to work with you on this project.

Did you actually purchase the home for a price that would make it an attractive rental?  Most people pay too much for their personal residence to make it a good rental candidate. 

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Be aware that if you live in the house for two years as your primary residence you can sell it and not pay taxes on the proceeds. If you turn it into a rental, if you sell it you will have to pay taxes. 

@Wanda Wilkinson - Just by making it a rental doesn't automatically make you pay taxes when you sell.  I believe it's over a 5 year period that you have to live in it for 2 years.  So if you live in it year 1 and year 5 and rent 2-4, no taxes on the sale.  If you rent it for 4 out of 5 years, then that is when you pay taxes.

@Sony Jacob - I honestly don't know, but I don't think the mortgage or refinance has anything to do with this timeline.  I am right in the middle of a refi on my primary with the intent on renting it and your question wasn't brought up as a concern with my cpa.

Please note that if you turn it into a lease and then you sell it, you will need to pay taxes. But you live in the house for two years as the main place of residence, and you don't have to pay taxes on income when you sell it.