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Do you have a gain on your current property that you can exclude? Would it be worthwhile to sell it, exclude the gain, and then buy another place to rent out. That way you get a stepped up basis in the rental and larger depreciation deductions. Obviously transaction costs would eat into the benefit but if there's enough gain, could be worth while.
Gain as in property appreciation? Yes. Substantial gain... nearly twice what we paid...
This paragraph is very interesting, but a tad bit outside my understanding (I understand what a stepped up basis is in the most simplistic terms, but I have very little understanding of that and the depreciation deductions). I will need to show this to my husband. He's better at getting something and then explaining it to me.
OP, check your state laws to see what you can ask of prospective tenants. For example, some states allow very large deposits, others don't. Some allow first, last, AND security, others just first and security. In New Hampshire, most LLs can only get first month and a security deposit equal to that, but if you have just 1 rental property, that law doesn't apply to you. (This is why I will likely only ever have 1 rental! Too many tenants seem to think it's OK to use their security deposit as the last month's rent, which leaves you with nothing if there is any damage at all. Not a chance I want to take.)
I became an "accidental landlord" about five and a half years ago when I bought my current house. I didn't want to sell my previous house at that time (market was stagnant), and I had tenants interested as soon as they found out I might rent it. It's been continuously rented since then; even with changes of tenants, the longest it's been empty (no rent paid) is I think 3 weeks. I am considered an "active LL" per IRS rules so I am allowed to deduct my (paper) losses from the income from my "regular" job; financially, it's worked out fine for me, although I always get very nervous when a tenant gives notice and I have to start looking (we have a very strong rental market here, especially in the neighborhood where the rental house it, but it is still VERY nerve-wracking).
Anyway, to get a mortgage on my current house, I had to have a signed lease and paid security deposit for the rental house. IIRC my lender counted 75% of the expected rental income against the mortgage on that other house; since the rent basically covered the mortgage payment (PITI), the remaining 25% counted as a "debt" in my ratios. (EG: mortgage on rental house $1,200, rent $1,200, bank counts 75% or $900, so the remaining $300 counts like any other debt.) Since I had very little debt, my ratios were still way under the maximums allowed.
My lender also required 6 months' reserves, which was 6 months of BOTH mortgage payments. Oddly, they counted my 401(k), so I had no problem qualifying with it.
Oh, one other thing. You mentioned that your HOA does not allow leases shorter than 6 months, but is there also a limit on the percentage of units that can be rented? I think condos start to have problems when too many of the units become rentals (can't remember the details as I've only owned SFH's).
Location: Was Midvalley Oregon; Now Eastside Seattle area
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FSM,
We didn't win in a Redmond condo last week. A listing (Friday) to bid selection (Monday 6pm) was 4 days. They advertised bid closing to be for 6 days, Wednesday.
I'm pleased with 0.55-0.60% monthly rent to Investment for our Eastlake condo. Son is a little disappointed in the cash flow but the appreciation is tremendous. I don't understand his complaint, The condo going to be his in a step up on our deaths. And I rather have good tenants than bad tenants.
Goodluck on your search. I'm cancelling a trip to Seattle next week because there's nothing to view.
PS, use a RE agent. We are using son's network RE agent. She is good and spouse is a contractor that has done inspections on the places we have bought.
PPS. Using a CPA, ( classmate) also a landlord, to give us advice.
Last edited by leastprime; 07-15-2017 at 01:06 PM..
Gain as in property appreciation? Yes. Substantial gain... nearly twice what we paid...
This paragraph is very interesting, but a tad bit outside my understanding (I understand what a stepped up basis is in the most simplistic terms, but I have very little understanding of that and the depreciation deductions). I will need to show this to my husband. He's better at getting something and then explaining it to me.
Quick example. Say you paid $200k for your house and that $200k is allocated 90% to the building and 10% to land. When you convert it to rental property you would get depreciation deductions each year =
$200k x 90% ÷ 27.5 years = $6,545 per year
However, if the property is worth $400k, it's your primary residence and you qualify for the exclusion, you sell this property without having to pay tax on the gain. Then you use those funds and buy another property for $400k. Assuming the same 90/10 split, your annual depreciation deduction would now be =
$400k x 90% ÷ 27.5 years = $13,090 per year.
So you get additional tax deductions of $6,545 per year which at a 25% tax rate potentially saves you ~ $1,600 in federal taxes per year.
Also, if you decide you decide you don't like being a landlord, you can sell the property and you'd use the $400k as your starting point for your basis (and if you use it only for rental, if you have a loss on the sale that would be deductible).
Again, transaction costs of buying and selling will eat into these savings but it could be worth it.
We are beginning the process of moving to a slightly smaller condo with the intention of renting out our current condo. I need to stress that we are really at the beginning of a three to five year goal so if I seem ignorant.. well, I am and that's to be expected right now.
1) How much money do we need to have prepared? I will list what I think we need. Please let me know if I'm forgetting something..
-I'm reading that banks expect 6 months reserve of mortgage coverage for both properties (we are mortgage free now, but have $1000/month in HOAs, taxes and community-provided internet)
-We need to cover closing costs
-We need a reserve to get current condo ready to lease (paint, carpet, appliances, etc..)
-Downpayment (at least 20%.. but we've never put less than 30% down)
2) Assuming the above we will have three to five years of saving.. we never had to hold cash for this amount of time before and although I'm aware of my options, I don't know if any of them are more beneficial than the other...
-Money market account
-Higher yield savings account (like Ally or Cap One)
-CDs
-Taxable account... conservative vehicles
3) Shopping for lenders..
-How far in advance do you start to look?
4) Resources for new landlords? I've heard managing a few properties is like running a small business. Would love to learn about management and systems to deal with renters and finances.
I did this exact same thing a year ago. Bought new house and rented my old one. Screw the sell it bs. If you're projecting $1500 a month income after costs I don't see what's stopping you. There is a crap ton of information on what and what not to do on landlording. You hung around here enough to know the do's and dont's. It's not like we're going to ignore your posts.
6 months minimum total monthly costs of the mortgage on any property you have that carries a mortgage regardless if it's a investment rental or personal property.
Bank counts 75% of the rental income towards your income calculations. They usually like to see a few years of LL exoer Ended and rental income so they may see your current condo costs as a debt.
Get a RE lawyer to write you a residence specific lease agreement. (Whatever the type if residence you own SFR, condo, townhouse mobile home, cardboard box, tent etc you want specific leases. The reason for this is that the boilerplate type leases are really not very good)
Put 20% down. Doing more isn't going to drop the payment much so might as well keep your money. 20% is plenty.
Make sure you keep good records. You'll have income from the property but you'll also now have deductions as your rental condo is now a investment property so things you weren't able to deduct you are now able to do so.
Quote:
Originally Posted by SuiteLiving
Quick example. Say you paid $200k for your house and that $200k is allocated 90% to the building and 10% to land. When you convert it to rental property you would get depreciation deductions each year =
$200k x 90% ÷ 27.5 years = $6,545 per year
However, if the property is worth $400k, it's your primary residence and you qualify for the exclusion, you sell this property without having to pay tax on the gain. Then you use those funds and buy another property for $400k. Assuming the same 90/10 split, your annual depreciation deduction would now be =
$400k x 90% ÷ 27.5 years = $13,090 per year.
So you get additional tax deductions of $6,545 per year which at a 25% tax rate potentially saves you ~ $1,600 in federal taxes per year.
Also, if you decide you decide you don't like being a landlord, you can sell the property and you'd use the $400k as your starting point for your basis (and if you use it only for rental, if you have a loss on the sale that would be deductible).
Again, transaction costs of buying and selling will eat into these savings but it could be worth it.
I could of sold and transferred my taxes to my new property, but truthfully the income from the property far outpaced the tax savings by a huge margin.
I could of sold and transferred my taxes to my new property, but truthfully the income from the property far outpaced the tax savings by a huge margin.
If the replacement property is similar, wouldn't it produce similar income so you get the income and tax savings?
If the replacement property is similar, wouldn't it produce similar income so you get the income and tax savings?
wait are you talking about replacing a existing rental property for new rental property or a former personal residence turned rental property and transferring the former personal property tax to the new residence property tax rate?
I'm talking renting out my former personal residence and buying a new personal residence
Ok for my personal
My former property property tax was 3k. New residence property tax is 6k. I would "save" 3k a year if I moved the property tax from former to new. And I would of had to sell the old property.
The rental property cash flows well well over the 3k tax savings. And having the additional tax advantages and deductions and not to mention the income
The property will be more valuable in the future in value, equity and yearly income. Truthfully if I sold now I would not be able to purchase again in the area anytime in the foreseeable future. The yearly gross income loss alone would be substantial. So in three years I'm looking at a a huge loss of gross income. I would be absolutely out if my mind to do anything else but rent it.
Hell al it takes us doing your damn homework on how to rent and be a LL. Is there some risk? Sure. But so is Wall Street and walking to the bus station.
wait are you talking about replacing a existing rental property for new rental property or a former personal residence turned rental property and transferring the former personal property tax to the new residence property tax rate?
I'm talking renting out my former personal residence and buying a new personal residence
Ok for my personal
My former property property tax was 3k. New residence property tax is 6k. I would "save" 3k a year if I moved the property tax from former to new. And I would of had to sell the old property.
The rental property cash flows well well over the 3k tax savings. And having the additional tax advantages and deductions and not to mention the income
The property will be more valuable in the future in value, equity and yearly income. Truthfully if I sold now I would not be able to purchase again in the area anytime in the foreseeable future. The yearly gross income loss alone would be substantial. So in three years I'm looking at a a huge loss of gross income. I would be absolutely out if my mind to do anything else but rent it.
Hell al it takes us doing your damn homework on how to rent and be a LL. Is there some risk? Sure. But so is Wall Street and walking to the bus station.
we're talking about different things. Glad your situation is working out well for you
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