Hello BiggerPockets Community!

I'm a newbie and am seeking guidance from anyone who has experience turning their own home into a rental. I'm thinking about renting out my current townhouse and buying a single family residence. I am currently on a 7 year loan and will need to refinance in a year and a half. I am thinking about refinancing into a 30 year fixed before my current loan becomes due. Will I have to refinance again when I rent out my property? I know loans for your own residential property have lower interest rates than those for investment properties. I don't want to waste money refinancing twice if I don't have to. I have a $275 HOA fee but live in a good school district. Please share any horror stories or other items I should be thinking about; I would love to learn from them. Thanks in advance!

-Tina

Hi @Tina Cheung . I can help: My very first deal was a rental townhouse. Need more info, though. Is this a condo (you jointly own common areas, like roofs, with the other owners) or fee-simple (you own all the property on the lot) arrangement? Also, is that $275 monthly or annual? What monthly rent could you reasonably collect?

Thank you @Mitch Messer ! It is a townhouse fee-simple, the townhouse is only connected garage to garage, so the back of my garage is connected to my neighbors garage. From the front of my townhose, it looks like a single family home because it has it’s own driveway. The $275 is monthly; I checked on rentometer and can probably rent it out for $3,000 per month. I live in Northern California so rents are extremely high right now.

@Tina Cheung the very first thing I'd make sure you check are your Condo docs (HOA Docs, bylaws, PUD Docs...whatever documents that you agreed to uphold upon purchase and that govern that $275 payment.) Many HOAs don't want absentee owners and severely limit the numbers of units that can be rented.

Otherwise, Good luck!  

Thank you @Steve McGovern ! I will check the HOA Docs to make sure there arent any restrictions.

Hi Tina Cheung   I would think you want lending at the owner occupant rate which is what you have right? Also is it a balloon that needs refinancing, how likely is it that they will renew. If its a 7 year loan you would be paying that off in 7 years, which would be good if the numbers are working now, but not when you want to get another.Maybe best to secure refinancing before getting a new place if you don't have the cash flow. In any case the sooner you convert to a rental the better as then you will start avoiding and deferring taxes, and freeing up more money to invest.

@Tina Cheung I agree completely with the HOA restrictions point made by @Steve McGovern and the refinancing points made by @Robert A Garcia .

In addition, please be very focused regarding your numbers. If you as a landlord use cash-on-cash return (CoCR) to assess rental deal quality, do the math to ensure that this deal will yield you the return you require. When you divide your Net Operating Income (Gross Rents minus Taxes, Insurance, Vacancy, Management and Maintenance) by the current retail value of the property, what COCR do you get? In my market, I can do deals all day at 10+% CoCR. If you can as well, then don't accept less than that just because this happens to be an easy deal for you to do.

Thanks @Robert A Garcia ! My current loan is at the owner occupant rate, but I will have to refinance within the next year and a half as that is when my 7 year loan is due. I won’t be able to renew. If I refinance to a 30 year owner occupant rate before looking for a new place will I have to refinance when I rent out the property or will I be able to keep it at a owner occupant loan?

No bank would care or even know that you have it rented out. They only care that you make the payments and do what you are supposed to do(pay taxes and insurance if they don't escrow for you). In the future if you had a LLC then when you start the loan you can have the LLC own it and you sign a personal guarantee for the investment property. If you live in your own home now and its worth more than you paid, your basis is low; sell your own home to your LLC first at the current market value (higher) and avoid the capitol gain, through exemption for sale of own home, plus get the higher basis for depreciation.

What is the value of the home and monthly debt repayment expected to be.

With max rent at 3K value is extremely important factor

@Thomas S. The home is worth about $950k; the monthly debt replacement would be $1,150 per month, taxes are $650 per month, HOA is $275 per month and insurance is about $40 per month. I'm not sure how to calculate vacancy and maintenance but the home is only 6 years old so there shouldn't be too many big ticket items. Thank you!

Thanks @Mitch Messer ! How do I calculate monthly maintenance and vacancy? I’ve read  that management fees are usually between 8-10%. The current value is about $950k; it’s appreciated a lot in the last 6 years.

Thanks @Robert A Garcia !!!!

You state that your debt replacement is roughly $1,150 per month. At a 4% interest I assume that you still owe around 250k on the property.  So you have roughly $700K equity tied up in the deal. 

At $3,000 monthly rent your cashflow would be $885/month. I personally wouldn’t be happy with that return for the amount of equity tied up in the house.

Yes @Account Closed you are correct, thanks for the insight! 

Can she transfer the property into an LLC and do a cash out refi to buy a less expensive place for cash and rent both?

In my opinion LLCs are too costly in California since there is a minimum $800 franchise fee per year. I would suggest to buy more liability insurance if your concern is liability protection. I’m not an attorney and this is not legal advice.

As far as a cash out refi goes she only would have about an $885/month cash flow. If you take about $185k your additional monthly mortgage would be roughly $885. This would put her at break even level. 

Assuming the OP wants to stay in the Bay Area, $185k won't buy her anything close to resembling an SFR in here area.