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I am 25 y/o and I just closed on my first house about a month ago. In May 2016, my parents' lease in Northern Virginia ends and they are looking to move down to Richmond Virginia. I wanted to purchase a house and then rent it out to them. They'd be saving money on rent, and I would make a small profit. It would be a win/win situation. I know the house will be considered an investment property so I was wondering what that meant exactly. Is a 20% downpayment a requirement for an investment property? For my current home, I used an FHA loan and put down just 5%. I technically am a Landlord now as I rent out 2 of my bedrooms for a total of $1200/month and can verify that income from bank statements (they write me personal checks). My mortgage is $908.91/month.
The broker that I reached out to told me this: "Yes, investment properties generally require 20% down. And unfortunately renting out bedrooms probably won't qualify as rental income because it's a not technically a lease-able space. BUT, what you are doing is a great way to earn extra income and start working toward more investment properties. My advice would be to pay down the mortgage on the house you have for a solid year with the extra rent you are getting. Then look at buying another home to live in and keep the one have as an investment property. It's a lot easy to things that way, then to buy a property for investment purposes. Just keep buying houses that you "live in" for a year, but don't sell the others. and in a few years, you will have a portfolio!"
I'm pretty sure my lender told me that as long as they can verify 1 year of steady rent checks, they will count that as my income. Has anyone experienced that? I don't want my debt:income ratio to hold me back from being approved for a house, since I do make an additional $1200/month in income technically. Not to mention, my parents would be paying for the mortgage of my second home. I'm only looking at small houses/townhomes in the $80k-$100k range so nothing too extravagant where the mortgage will exceed $600 per month.
I have about 9 months to figure this all out, but any/all advice is welcome now. I'm not sure if I should put this in the Richmond-specific forum or if it's OK here in the general real estate forum. Thanks in advance!
Tax returns are used for verification of income. Some lenders only count rental income if you have a certain amount of equity in the proprerty. So you need to pay it down or have appreciation. There may be a way to purchase the property as owner occupied if they want to live there.
Last edited by thelopez2; 05-05-2015 at 08:14 AM..
Reason: changed owned to live there.
My parents' credit unfortunately will not qualify them to own as they have foreclosed on a house in the past, which is why I wanted to purchase it for them so they can have a nice, stable place to live and have a really cool Landlord that they can trust
So I guess the broker was correct that I will need to pay it down. Unfortunately, I can't really afford to use their rent as extra money towards my mortgage since their money is what I'm using to save up for a down payment. I'll check with my lender again and see what we can come up with. Maybe I could look into a rent-to-own situation where I could eventually own the property but I'm not sure how I feel about that.
Just curious, how would they know? Last I checked, H&R Block has no access to my bank account which is the only place the transactions can be found.
Admittedly, IRS is not likely to find out. Unless one if your tenants or an ex girlfried gets peeved at you and rats you out. You'd be surprised to find out how often this happens, especially since IRS might pay them a reward. Whistleblower - Informant Award
But consider this: No mortgage company is going to accept that $1200 per month to qualify you for a mortgage UNLESS it shows up on your tax return. Bank statements won't help. The mortgage company wants to see a lease and that you are claiming it as income on your tax return (typically, for two years straight, but sometimes less).
Moving forward, I think it will be best then to cash the funds, then deposit them as cash. That way, there's no record of personal checks (besides the first month's). That way, if they ever rat me out I'll just act dumb... Hmm... not sure what you are talking about? That's just a payment for [piano lessons] or any other random side gig haha
Seriously, thanks for the heads up. I'm not trying to be sketch although I know it looks that way, but after filing my 2014 taxes and having to OWE, it's made me a little weary about claiming any additional income. The whole point is for me to make extra side income, and thus far it's worked beautifully. I guess I'll just have to look into some more options then. Maybe my current salary would qualify me, it would just be nice to have the extra $1200/month of course show up as part of my salary. I guess I can't have my cake and eat it too.
Either file taxes with the information, so they can count it. Or, deposit as cash, and then they will not be able to trace where the money is coming from and therefore not consider it rental income.
Moving forward, I think it will be best then to cash the funds, then deposit them as cash. That way, there's no record of personal checks (besides the first month's). That way, if they ever rat me out I'll just act dumb... Hmm... not sure what you are talking about? That's just a payment for [piano lessons] or any other random side gig haha
Seriously, thanks for the heads up. I'm not trying to be sketch although I know it looks that way, but after filing my 2014 taxes and having to OWE, it's made me a little weary about claiming any additional income. The whole point is for me to make extra side income, and thus far it's worked beautifully. I guess I'll just have to look into some more options then. Maybe my current salary would qualify me, it would just be nice to have the extra $1200/month of course show up as part of my salary. I guess I can't have my cake and eat it too.
Either file taxes with the information, so they can count it. Or, deposit as cash, and then they will not be able to trace where the money is coming from and therefore not consider it rental income.
Thanks again!
Any SMART tenant is going to want a receipt, or at least write a check so they have the cancelled check.
Do what you want, but at least be honest about it. You are committing tax fraud, plain and simple. Along with millions of others, no doubt, but that still doesn't make it right.
If you want to grow, declare the income, adjust your w4 so you don't pay extra at the end of the year. Your $1200 will pretty much be wiped away with property taxes, interest,insurance, pmi, utilities, repairs, maintenance, depreciation, equipment, supplies. Look at a 1040 schedule C. Talk to a tax advisor not just someone that files tax returns.
Moving forward, I think it will be best then to cash the funds, then deposit them as cash. That way, there's no record of personal checks (besides the first month's). That way, if they ever rat me out I'll just act dumb... Hmm... not sure what you are talking about? That's just a payment for [piano lessons] or any other random side gig haha
Seriously, thanks for the heads up. I'm not trying to be sketch although I know it looks that way, but after filing my 2014 taxes and having to OWE, it's made me a little weary about claiming any additional income. The whole point is for me to make extra side income, and thus far it's worked beautifully. I guess I'll just have to look into some more options then. Maybe my current salary would qualify me, it would just be nice to have the extra $1200/month of course show up as part of my salary. I guess I can't have my cake and eat it too.
Either file taxes with the information, so they can count it. Or, deposit as cash, and then they will not be able to trace where the money is coming from and therefore not consider it rental income.
Thanks again!
Umm, my recommendation is that you pay the taxes you owe on the income you're hiding from the government and not continue to commit fraud. And, of course "random side gig"s @ $1200/month is income that must be declared, as well, so I'm not sure why you think adding that lie on top of the fraud would be better. I'd strongly recommend speaking with a tax professional if you care to stop breaking the law. Refiling your 2014 taxes to correct the "mistake" wouldn't be a big deal nor carry large penalties, if you step up now.
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