We are 10 years into our first home and getting the itch to move into a little more space. I've been studying/ contemplating acquiring rental homes for a few years.

Since finding the first deal seems to be the most challenging part of getting started it occurred to me that we may already be in our first deal. Based on what I see in our area I'm confident we could rent it for $400-$500 more than what we're paying in mortgage, taxes, and insurance.

Our home is in really good shape, and maybe with just some interior paint it would be rent ready. Being 10 years old I would likely have the roof inspected too. So it seems that w/ our existing home I have already covered the rehab/repair steps that I would have to take compared to other properties that need work.

Anyone have experience doing this; any practical advice to share? What are lenders looking for?

thanks

Factor in that you will lose your homestead exemption so your taxes will go up. Your insurance will go up as well. Repairs will become more common since even good renters won't maintain the house like you would.

If you can afford it do it. Great way to build your portfolio. If you are moving out of the area, factor in 7-8% for rental management. Consider refinancing and reducing the length of your mortgage for an earlier pay off.

Could this also affect their mortgage?

Nothing changes with your mortgage if you move out of your primary residence and convert to a rental. When you obtain a mortgage for a primary residence you state that your intent is to occupy for a year. Even if you don't occupy for a full year, what matters is your intent. But if you do occupy for a year, there isn't even a question. The federal government gives cheap money to encourage home ownership and occupancy, not empire building.

I was told by Liere that insurance for your primary is actually more expensive than a rental.

Property taxes will go up because you'll lose your homestead exemption.

OP, you should do it, and stay in it for the long term.

This is a great idea imo.

Do keep in mind that your full payment on your departing residence will count against your debt to income ratio and you will want to qualify with that payment, your proposed payment and any other debt you may have. if you do, no problem. If you do not, you would have to show a lease on the departing property to help offset that payment. Timing on that can be tough.

You have to certify your intentions of occupying the property within 60 days. Nothing about intentions of occupying for a year.

I hear you on the 60 days, and I'll admit the last time I purchased a home as my primary was 2014, but at that time, I signed something at closing to the effect of this:

Borrower shall occupy, establish, and use the Property as Borrower's principal residence within 60 days after the execution of this Security Instrument and shall continue to occupy the Property as Borrower's principal residence for at least one year after the date of occupancy.

Has that second part gone away? Otherwise, why wouldn't I purchase a home as my primary with better debt, occupy for 60 days, then convert to a rental?

Edit: spelling is not my best talent.

I've never heard of the one year thing.

I would love to find as many clients as possible who buy a house, get a mortgage, occupy it within 60 days, buy another house, get another mortgage, occupy within 60 days and then repeat over and over.

I'm on my phone and can't figure out how to do it....but insert "I'm your huckleberry" gif here.

Red that could of been lender specific. They add their own docs at times. I have not seen that bit to be fair I've not read a whole packet in a while.

Jay@AgsReward.com said:

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If you do not, you would have to show a lease on the departing property to help offset that payment.

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Jay, I haven't been in this situation in a while but wasn't there a rule that you had to have two years of landlording experience to count the lease on the departing primary residence as income?

For a conventional loan, you just need to show the lease to use 75%. There are portfolio products etc that do not go by Fannie/Freddie that can require two year history or lenders that have overlays of Fannie/Freddie products that require more then they are required.

Thanks for the input so far. Say I have 40-45% equity in the current home. Does it make sense to do a cash-out refi to use as a down payment on the new one (if that's even possible)?

I guess I'm trying to figure out a formula that factors in:

-equity in current home
-anticipated rent rate
-price of new home (likely about $100K more than value of current home)
-cash needed for closing

jja79 said:

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I've never heard of the one year thing.

I would love to find as many clients as possible who buy a house, get a mortgage, occupy it within 60 days, buy another house, get another mortgage, occupy within 60 days and then repeat over and over.

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It's a thing. FNMA/FHLMC define a primary residence as a residence that the borrower occupies for the majority of a calendar year, so you sign an occupancy affidavit at closing that states you will take occupancy within 60 days and intend to use the property as your primary residence for the next year.

Are they going to come after you if you don't maintain it as your primary for the next year? Probably not, because stuff happens in life, but if you show a pattern of behavior of applying for loans as your primary residence and then not maintaining occupancy they might deny your loan. If you begin defaulting on those loans there will probably be fraud considerations.

As far as using equity on your primary to fund the purchase of a home, you can definitely do that, but it's up to you to determine if that's a financially reasonable thing to do. You'd get a loan, they'd fund the cash out refinance to the purchase title company and you'd close with that as all or part of your down payment.

Maybe so but I've been to a lot of closings and don't recall ever seeing or hearing that. Headed to close a loan with a Texags poster this morning. I'll see if it's there.

I've participated in over 7,000 closings on primary residences and it's been in every loan package I've ever done (regardless of product/investor, FHA/VA/FHLMC/FNMA it's on every one). It may not be a standard verbiage, I've only worked at one company for mortgage, but we have had 5 document vendors in that time and it was definitely on both my purchase documents and my refinance documents for my home. I went through two different companies for both of those transactions.

I had my assistant call Fannie Mae this morning and he was told there is no one year requirement. They said it might be a specific lender overlay.

That was my guess too. Good to confirm

When you convert, you have to establish a basis cost for the property. You can use your purchase price plus any improvements. The higher the basis, the more depreciation you can deduct each year.

Since this forum isn't terribly busy I hope y'all don't mind if I keep this thread going. I figure I'll present some actual numbers to see what you think.

I owe about $118K on the home.
I could sell it today for $220K. $230K w/ a little patience.
Need to research nearby rental activity and rates more, but I believe I can get $1,800-$1,900/month.
I'm less than $1,400 for mortgage, taxes, and insurance.

Any other thoughts on A) using a HELOC as a down payment on a new primary home and renting out the current one, or B) using a HELOC as a down payment for another (to be found) rental property?

It sounds like a HELOC is likely beneficial for you. Put it in place now if you think it will come into play. It costs nothing up front (unless you want to dispute the lender's desktop valuation) and you pay no interest until you draw against the line. I'm an advocate of anyone with significant equity putting a HELOC in place. No upfront cost, no interest cost unless you use it and it's readily available funds if a need arises where quick action is required.

Interesting. Thanks for the input.