Move into rental property? I need your advice.

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dreamjob9
Posts: 113
Joined: Fri Mar 29, 2013 3:13 pm

Move into rental property? I need your advice.

Post by dreamjob9 » Sun Mar 31, 2013 12:08 am

Hi,

I appreciate so much all of the information on this fantastic site! My questions are in regards to our rental home.

About me: starting a 1 year fellowship in july 2013. Finishing medical residency in june 2013. Project that my income will increase ~4 x starting in july 2014. Our jobs are stable. Wife makes 140k, Me currently 60k.

Emergency funds: Six months of expenses.
Debt: Student loan debt of 192k at (2.75 - 4.75 %). No credit cards or car loans.

Tax Filing Status: Married with 1 child (1 year old)
Tax Rate: 20% Federal, 5% State
State of Residence: Ohio
Age: Me 32, Her 30
Current retirement assets = 73k (401k 23k, roth IRA 50k).
Credit ratings are excellent. Savings = 25k.

Rental property mortgage = 153k (169k original) at 6.75%. The home is currently worth 135k. We have been renting the house out for the last 5 years. We carry forward a (minus 20k) passive loss on our 2012 taxes. We rent the home for $1250 a month. Our total payments including taxes, insurance, PMI and mortgage is $1650 a month. Net monthly loss of $400 (UGH!).

We are in the process of moving back to the location of our rental home. We currently have good renters who want to stay. Our options are either #1 Move back into our rental home. The timing of the lease allows this to be possible. #2 Attempt to sell the house and bring ~20k to the table at closing to cover the difference and live in a rental. #3 Keep renters in home and live in a rental. Rental home would cost roughly $1500 a month.

Here are my questions; #1 I want to perhaps refinance the home if we don't sell. I have been told that we will have trouble doing so, if it remains a rental property? #2 What are the tax implications if we begin living in our rental property? #3 Does refinancing make sense if we plan to live in the home for 1-2 years and how much $ would you guess we will need to bring to refinance? #4 Instead of spending our money on refinancing should I put towards student loans at 4.75%?

To this point, I thought the best option was to move into the home, fix it up a little over the next year and sell it. Perhaps refinance as soon as we move in, if financially sensible. I am beginning to have second thoughts. Concerned about tax implications. Also, the house is not ideal for our family (1 year old). Any advice would be appreciated. Thank you.

connya
Posts: 132
Joined: Tue Mar 05, 2013 4:01 pm

Re: Move into rental property? I need your advice.

Post by connya » Sun Mar 31, 2013 8:43 am

As to the refinancing, it is difficult to do so on a rental property if the loan to value ratio is over 70-75%. Your house is currently underwater at 113% LTV so I don't imagine refinancing will be an option for you unless you drop 50k into the house first.

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englishgirl
Posts: 2473
Joined: Thu Mar 01, 2007 5:34 pm
Location: FL

Re: Move into rental property? I need your advice.

Post by englishgirl » Sun Mar 31, 2013 9:01 am

Move back into the home.

You're renting it at a $400 per month loss, and then you're talking of renting somewhere else for $1500 a month on top. So the choice is paying $1650 for your own house vs. $1900 to live elsewhere, which is a $250 a month difference. Plus, you have the opportunity to fix it up a bit while you live in it, and refinancing would be easier if you are living there. I would then try to sell it when your year is up (although if I were determined to sell it quickly, I might not bother with refinancing even if it was available - that choice would depend on the closing costs, and how long it would take to recoup them).

Even if the house is not ideal for a 1-year old, you're only talking about a year.
Sarah

TroutMD
Posts: 79
Joined: Tue Dec 25, 2012 10:58 am

Re: Move into rental property? I need your advice.

Post by TroutMD » Sun Mar 31, 2013 9:05 am

Another option, let the renters decide for you.

Lease renewal only if they pay X amount more. I am not sure you can do a $400 increase, but I would shoot for $200 more per month. Your arguments can be that the housing market is slightly better now?

I'll defer the other questions to someone else.

dreamjob9
Posts: 113
Joined: Fri Mar 29, 2013 3:13 pm

Re: Move into rental property? I need your advice.

Post by dreamjob9 » Sun Mar 31, 2013 10:37 am

Thank you for the replies.

Does anyone know what the tax implications are of moving into a rental property. Additionally, should I factor in the savings from being able to write off the mortgage interest? Something that I believe has been going to passive losses.

jcw
Posts: 56
Joined: Fri Nov 23, 2007 2:37 pm

Re: Move into rental property? I need your advice.

Post by jcw » Sun Mar 31, 2013 11:35 am

The best financial choice is to move back into the house and refinance to the current mortgage rate of ~3.5%. You need to be owner occupied to get the 3.5% rate. The savings from going down to that rate would probably be ~$200. If you stay in the house for 2 years, you can sell it tax free after that. It's a better option then selling a rental property. Or you can simply move out and probably rent it and be almost cash flow positive with the lowered rate. You might also consider just remodeling the house to make it "family-ready" and stay there long term.

I'm not 100% sure about tax implications. I have gone from owner-occupied to rental property in my own house but not the other way. My assumption is that when you move in, it just become owner occupied. You get to write off all the mortgage interest, PMI, and property tax from your income tax. You can no longer take tax depreciation. And again, if you stay in it for at least 2 out of the next 5 years, you can sell it as an owner-occupied first property, which will allow to pay no taxes up to $250k or $500 (married).

jcw
Posts: 56
Joined: Fri Nov 23, 2007 2:37 pm

Re: Move into rental property? I need your advice.

Post by jcw » Sun Mar 31, 2013 11:37 am

Forgot to mention that if you are not planning to stay, you can do penfed 5/5 ARM at around 2.5%, which would lower your rate even more. You would need to exit within 5 years before the rate moves up (potentially).

Twins Fan
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Re: Move into rental property? I need your advice.

Post by Twins Fan » Sun Mar 31, 2013 12:04 pm

My 2 cents... I'm no expert, but I do own a rental property that I used to live in, so I've picked up a thing or two.

After years of trying to refinance it and being told "no dice" becuase it wasn't my primary residence and I had no equity, I found a place to refinance it for me. I am underwater on my home also, but only slightly. My prior interest rate was 6.375% and the refinance will get me to 3.75%... for a monthly change of about $400 in my favor. Definitley worth looking into!!

Is your current mortage a FHA loan? The FHA streamline program WILL work with rental properties, no equity, and even underwater homes. But nobody in the refi world seems to know this or want to help anyone in that situation??? I actaully found two places that said "no problem" in my recent refi quest with my rental situation. Also, the HARP 2 (or 2.0?) program is available for your situation if you don't have a FHA loan. If interested, PM me and I can get you the contact info (if FHA) to look into refinancing your home.

As far as tax implications for moving back in, none against you that I know of. You will still be able to deduct the interest... assuming it's over the standard deduction. As others mentioned, if you move back in and live there for two years all worries of depreciation and capital gains go away.

As far as the current renters, are these close friends, or family of some sort? If not, or even if that's the case, I would not worry about their "feelings" in the situation. Simply tell them your plans, that you will be moving back in, and that they should start looking for another place. It is your home after all. JMHO

You and your wife have a very good combined income already and it's about to increase a lot soon. I'm guessing you could probably pay the home off in a couple years, if you chose to do so. And, also pay down the student loans? I'd say move back into your home, contribute to any tax advantaged accounts, and pay down the mortgage and student loans. Just my advice...

You sure you're in the 20% bracket with your combined income? Or, do you file married but separate?

dreamjob9
Posts: 113
Joined: Fri Mar 29, 2013 3:13 pm

Re: Move into rental property? I need your advice.

Post by dreamjob9 » Sun Mar 31, 2013 12:53 pm

Thank you guys.

The house is a Fannie mae/Freddie Mac backed mortgage. We purchased the home BEFORE 2009. I have had zero luck with qualifying through the HARP 2.0 program with our current loan servicer Greentree. My plan was to move back into the home in June 2013. At that point attempt to qualify for the HARP 2.0 program as the home will now be our primary residence. We will live in the home for atleast 1 year (June 2013 - June 2014). At that point, I do not know if we will stay in the home or move to another part of the country. I put the odds at 50/50 staying vs leaving.

Twins Fan - If you have an idea or person I could contact that could help with our situation, given the added info above, I would appreciate it. Could other lenders/servicers perhaps better help us get approve for the HARP program besides Greentree?

JCW - Your math is the same as mine. The best move is to move back into the house. If we don't qualify for the HARP program, I like the idea of the penfed 5/5 ARM at 2.5%. Especially, if we stay in the home past June 2014.

If we DON'T stay in the home more than 1 year and sell the home for a loss, are there any tax implications for carrying a (-20k) passive loss on our taxes for the past few years?

Thanks.

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DiscoBunny1979
Posts: 2007
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Re: Move into rental property? I need your advice.

Post by DiscoBunny1979 » Sun Mar 31, 2013 1:18 pm

jcw wrote: Or you can simply move out and probably rent it and be almost cash flow positive with the lowered rate.

Sometimes the advice given on a website can be with good intentions, but awfully bad advice if followed. The OP would have to read the loan docs to determine 1) if there is a certain period of time required by the OP to live in the home after the HARP 2 loan is completed, and 2) whether under the HARP 2 loan program it must be owner occupied or whether the home can be rented out, and if so, when. Many home loans come with clauses that say that the loan can be called if the original contract provisions are not kept - such as being "owner occupied". Some loans have clauses that say that any change, such title changes, must be reported to the loan administrator. I'm sure the insurance company would be interested in knowing if the home would be 'owner occupied' or rented out. There could be insurance cost differences for a rental property. IF the OP knows they will not be owner occupied and are just getting it occupied to obtain a lower rate, that might be considered LOAN FRAUD. I would be careful with the "intentions". I would be CAUTIOUS giving advice because the new loan has not been gotten and we don't know what the fine print says.

dreamjob9
Posts: 113
Joined: Fri Mar 29, 2013 3:13 pm

Re: Move into rental property? I need your advice.

Post by dreamjob9 » Sun Mar 31, 2013 1:32 pm

DiscoBunny1979 wrote:
jcw wrote: Or you can simply move out and probably rent it and be almost cash flow positive with the lowered rate.

Sometimes the advice given on a website can be with good intentions, but awfully bad advice if followed. The OP would have to read the loan docs to determine 1) if there is a certain period of time required by the OP to live in the home after the HARP 2 loan is completed, and 2) whether under the HARP 2 loan program it must be owner occupied or whether the home can be rented out, and if so, when. Many home loans come with clauses that say that the loan can be called if the original contract provisions are not kept - such as being "owner occupied". Some loans have clauses that say that any change, such title changes, must be reported to the loan administrator. I'm sure the insurance company would be interested in knowing if the home would be 'owner occupied' or rented out. There could be insurance cost differences for a rental property. IF the OP knows they will not be owner occupied and are just getting it occupied to obtain a lower rate, that might be considered LOAN FRAUD. I would be careful with the "intentions". I would be CAUTIOUS giving advice because the new loan has not been gotten and we don't know what the fine print says.
I am the OP.

I don't know the answer to these two questions; 1) if there is a certain period of time required by the OP to live in the home after the HARP 2 loan is completed, and 2) whether under the HARP 2 loan program it must be owner occupied or whether the home can be rented out, and if so, when. If someone knows the answers I would love to hear them.

As for occupying the home just to obtain a lower rate. We are moving back to the location of the rental home, which used to be our primary residence. We are doing so because of a job that lasts for 1 year. There may be an opportunity to stay longer, but I won't know until halfway through the year.

Again, if someone could explain the tax implications If we DON'T stay in the home more than 1 year and sell the home for a loss, are there any tax implications for carrying a (-20k) passive loss on our taxes for the past few years?

Thank you.

john94549
Posts: 4638
Joined: Tue Jul 26, 2011 8:50 pm

Re: Move into rental property? I need your advice.

Post by john94549 » Sun Mar 31, 2013 3:34 pm

A potential shift in the property from Nonqualified to Qualified (i.e., rental to owner-occupied) presents tax issues best addressed by a tax professional. See IRS Pub 523.

Twins Fan
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Re: Move into rental property? I need your advice.

Post by Twins Fan » Sun Mar 31, 2013 7:24 pm

I think the HARP 2.0 program can also be used for a rental home that is underwater. That's originally what I was looking into... until I looked and realized mine was a FHA loan. Doh!!

OP, I will send you a PM with my rfi contact's info. Maybe they work with the HARP program also? Worth a shot.

dreamjob9
Posts: 113
Joined: Fri Mar 29, 2013 3:13 pm

Re: Move into rental property? I need your advice.

Post by dreamjob9 » Sun Mar 31, 2013 9:36 pm

Twins Fan wrote:I think the HARP 2.0 program can also be used for a rental home that is underwater. That's originally what I was looking into... until I looked and realized mine was a FHA loan. Doh!!

OP, I will send you a PM with my rfi contact's info. Maybe they work with the HARP program also? Worth a shot.
Thanks Twins Fan.

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