My wife and I are looking to a but a house pretty soon, and would like something that has tenants already in it. We want to be able to have the house payments covered while we finish out our apartment lease, and possibly flip it sometime next year.
I know lenders give you a higher rate and make you put money down for an investment property, but has anyone used a work- around this so you can go with a lower rate on the home? We’re talking almost a 2% spread in interest which is why I’m concerned.
There is no workaround other than try shopping for lower rates. Trying to beat the system and saying its owner occ may work but its also mortgage fraud. You need to find a deal that cashflows even with the higher interest rate.
Non owner occupied properties are typically about 3/8 to a half point higher than a regular loan. They usually require a 25% down payment, but if you just do 20% or less, of course the rate is going to be higher.
If it’s your first property, then the banks would believe you if you said it was going to be owner occupied. Although this could be classified as mortgage fraud, the banks would have to prove that you never intended to live in it. The key is that you can always intend to move in, but if you later changed your mind for some reason, I’m not sure they can say that it’s fraud.
Anyway, we need more information to help. First buying something that you plan to flip in a year is a bad idea in general unless there’s special circumstances in your area. The house probably needs to appreciate by 10% in order for you to break even. That 10% includes the seller’s commission, and closing costs from two closings, plus taxes and other expenses. Maybe more like 8-9% because you don’t have moving costs when it’s a rental. Is your market headed up or down? Most areas of the country are still down although there’s signs that certain areas are headed back up again.
the first step to a successful REI experience is to buy your own home.
at closing you will be asked to signed a very specific stating that you intent to occupy the property as your primary residence. To do otherwise is mortgage fraud.
I’m not trying to rip anyone off, I was just curious from the standpoint of my wife and I buying the house, then a few months down the road find a really nice property we’d rather live in, buy it, and put the other one up for rent. Nothing intentional, but I don’t want to get burned if we do end up taking a route like that.
There may also be an insurance liability issue involved if you buy it with the intent on living in it yourself vs. renting it out. Not sure, but if the place burned down, you may not have the correct coverage to get a claim processed. Just guessing here.
I guess as long as you occupied the property after closing, you’re probably all set. I think the bank expects you to occupy the property for a year, but I don’t think they can do anything at all if you decide to move before that, especially if you occupied it at some point.
As for the insurance policy, you would probably have to get a fire and dwelling policy which is actually more expensive than a homeowners policy yet has less coverage because the tenant’s belongings aren’t covered. You would just get that when you convert it to a rental.
Don’t be shortsighted here. Buying then selling in less than a year means that you will not have that much appreciation in the property when you sell. If fact, you will be giving away all of your potential profit in sales commissions.
Even if you do wind up with some money in your pocket, your small profit will be taxed at your ordinary income tax bracket. Why bother if you are not going to make money on your deal.
Buying with a tenant in place, means you have to honor the existing lease, by law. You can not evict just because your current lease is up and you want to move into the property. You can always pay your tenant to move if lease expiration does not happen on your timetable, but this is just more money out of your pocket.
If this is to be your primary residence, then plan on staying in the property at least two years. After two years, your sale profit up to $250K per taxpayer is tax free. After two years, 5% annual property appreciation will exceed the selling costs, giving you a high probability of making a profit.
If you have the time and energy, consider buying a rehab property to live in as your primary residence. Rehabs are sold at a discount to FMV, so you should have some equity in the property going in. You do the rehab while you are living there and just increase your equity with your own sweat and labor. Now if you sell after two years, not only is the first $250K of your profit per taxpayer tax free, but your equity has increased exponentially.
After two or three primary residence rehabs over six years or so, you may have so much tax free money in your pocket that we can call you wealthy.
Thanks for the advice Dave T. We are looking at different options and we found a lot of good deals with tenants living in but were concerned with tenant’s rights and dealing with that. We want a residence to live in, don’t get me wrong. We thought primary residence first, then find a rehab.
As far as sales commissions, we’re not planning on flipping a property quite yet, but we are interested in acquiring rental properties. Thus, the questions I had earlier. I really appreciate everyone’s input by the way. It’s a big help reading this forum