Renting out first home , moving out of state and buying second home to live in full time (pay, rent)
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I don't even know what my question is just yet. I guess its how do banks look at this? Is it really going to hurt my chances of getting approved for a different home? I would prefer to keep my current place since I do plan on going back in 6-10 years. The interest rate on it is great and I have someone interested in renting it for 30% over what its costing me every month in total. It's been my primary residence for 3 + years now with 24 years left on the loan. (refinanced at the start of the first year+paid extra each month)
My mortgage and tax payment each month equals out to 15% of my monthly pay. I have a down payment saved up for my next home. Planning on renting in the new area for a year before deciding weather to buy. Wondering if I should instead pay down this mortgage with the money ? Then renting an extra year or two to save up money again for a down payment.
I've spoken to several people at my bank but it seems like I get different answers all the time. Including how things are just changing so quickly on lending that no one knows.
I don't even know what my question is just yet. I guess its how do banks look at this? Is it really going to hurt my chances of getting approved for a different home? I would prefer to keep my current place since I do plan on going back in 6-10 years. The interest rate on it is great and I have someone interested in renting it for 30% over what its costing me every month in total. It's been my primary residence for 3 + years now with 24 years left on the loan. (refinanced at the start of the first year+paid extra each month)
My mortgage and tax payment each month equals out to 15% of my monthly pay. I have a down payment saved up for my next home. Planning on renting in the new area for a year before deciding weather to buy. Wondering if I should instead pay down this mortgage with the money ? Then renting an extra year or two to save up money again for a down payment.
I've spoken to several people at my bank but it seems like I get different answers all the time. Including how things are just changing so quickly on lending that no one knows.
You need to consider problems being a long distance landlord.
How many trips can you afford to make, to start and carry through, with the eviction process, should tenants seem to get further and further behind.
I have experiences with myself and an Uncle, as landlords, and the problems can get expensive, even if you are local.
Some tenants and their references, job, etc. make them the perfect tenant. Then 2-3 months later, things change in their life, they lose their job, your large oak tree falls on their car in a storm, someone in injured on your property, landlord-tenant insurance is alot higher, etc.
I don't even know what my question is just yet. I guess its how do banks look at this?
I've spoken to several people at my bank but it seems like I get different answers all the time. Including how things are just changing so quickly on lending that no one knows.
95% of people doing what you propose...
are doing so ONLY because they have NO OTHER CHOICE.
(Bankers don't like to lend to people who have no choices)
They're so far upside down on their mortgage (vs market value)...
that even if they had a buyer they would lose 10's (even 100's) of thousands doing the deal.
The other 4 44/100% doing it have already been foreclosed on.
---
The next series of questions are about just how much it will REALLY cost you to play at being a landlord
from (hundreds of?) miles away; even if the numbers appear to sorta work at the outset.
Hint: a whole lot more.
---
Bottom line? Sell if you can
Let your future desire sort itself out when that time comes.
You need to consider problems being a long distance landlord.
How many trips can you afford to make, to start and carry through, with the eviction process, should tenants seem to get further and further behind.
I have experiences with myself and an Uncle, as landlords, and the problems can get expensive, even if you are local.
Some tenants and their references, job, etc. make them the perfect tenant. Then 2-3 months later, things change in their life, they lose their job, your large oak tree falls on their car in a storm, someone in injured on your property, landlord-tenant insurance is alot higher, etc.
I agree with you that there will be issues with renting out property. Nothing is ever perfect and easy to do. What about using a management company to deal with renting it out, dealing with repairs, evictions etc. ? I've already looked into the insurance and yes its much higher than what I pay right now. It's still affordable overall and not an issue to switch.
Honestly, I think I'm just attached since it is my first home. Maybe a year or two after renting it...I'll say never again!
What about using a management company to deal with renting it out, dealing with repairs, evictions etc. ?
I have no experience with them.
What do they charge per month?
Do they keep the grass cut, etc.?
Our city has rules. If someone does not keep their grass cut, the City can knock on their door.
I could list, and you could too, a long list of issues with being a landlord.
In my state, you have to give a 5 day notice to evict. However, if you write this 5 day notice into the rental agreement, then you can start evicting on day #2 without a notice.
My Uncle tried to be Mr. Nice Guy. College students in a duplex. They got behind over $3500.00. They moved out and accidentally left some items behind. They had the nerve to ask him to let them in so they could get the rest. He never got a penny of the back rent.
He knows he should have put an eviction notice on their door the day they got behind by $1.00. He learned a $3500 lesson.
If your prospective tenants can not pay a large security deposit, as well as one months rent in advance, then beware.
Deposit should be a months rent, and the first month should be paid in advance. Suppose the rent is $600 a month. That would be $1200 up front. If they can not afford that, then why?
If their job status, etc. does not add up to the rent and their other bills, then tell them you'll keep their application on file.
Their kids could use crayon on the walls, the husband could accidentally spill a can of paint on the concrete and not know how to get it up, etc.
Not trying to be gloomy, but how will you deal with all of these very real scenarios, if you can not get there in 30 minutes?
They could let some of their friends move in. You won't know the difference, you'll be far away. When the cat's away the mice might play.
I'm doing the exact same thing. We moved from MI to NC (rented out our house in MI, bought our house in NC). When we were doing our NC mortgage application, I believe they took into account 80% of our MI rental income (not the entire amount, because of the risk of it not staying rented).
I'd do it again...I used a property management company for the first tenants (2 year term) and now I'm renting it privately to a friend of mine.
When turning a former primary residence into an investment property as you are there are 2 things that come into play. 1 is you must document 30% equity in the property by having an appraisal done. If not 30% can't use any rental income. If 30% or more you can use 75% of income from signed lease agreement. To use this amount you will need to provide signed agreemenet and cashed deposit check.
Keep in mind that once you start renting it out. It is no longer considered your primary residence, which means if you sell afterwards, all profit will be tax.
I think that this will hurt your chances to buy another home. Banks don't like to see another large outstanding debt unless you make a ton of money. Also, do you have experience being a landlord? If not, I'd sell and not worry about it.
I am in the same boat as you. I plan to rent out my primary home and move to another state in a couple of years. Not everyone is underwater. I know three landlords that are doing well and have a considerable amount of equity in their homes. I say go for it but you have to be smart. I think what hurts people is that they do not realize it is a business. A business requires reserves to deal with problems and a strong knowledge base. I recommend that you save a sufficient amount of money to account for lost rent and repairs. I would also require the tenant to purchase renters insurance.
I would not use a property manager. It is the responsibility of the tenant to report problems to you. I am sure you already have a list of contractors that can address problems as they arise. I am not sure how far away you are moving. I will be three hours away and I plan to visit the property semi-annually. This expense is completely tax deductible. I recommend that you get the "First-Time Landlord- Your Guide to Renting Out a Single-Family Home" by Nolo and the rental guidelines for your state.
Why do you want to buy in a state that you plan to stay temporarily? Your timeline is not very long in homeownership years. Do you plan to rent it out in the future and return to your primary home?
As for buying a second property, I was told that you have to prove that you have been receiving rental income for two consecutive years. I believe the rental income needs to be documented on your tax form; it will count towards your income. However, I am not sure if they will count the entire amount. I have not done any in-depth research on this. I do not plan to buy again for several years.
Good luck!
Last edited by goodlife36; 09-12-2011 at 02:29 PM..
Keep in mind that once you start renting it out. It is no longer considered your primary residence, which means if you sell afterwards, all profit will be tax.
I think that this will hurt your chances to buy another home. Banks don't like to see another large outstanding debt unless you make a ton of money. Also, do you have experience being a landlord? If not, I'd sell and not worry about it.
Unless it has recently changed, I believe you have to have it as your primary residence for two of the previous five years before profits are taxable, giving the seller up to three years to rent the place before having to pay capital gains.
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