I’m in the process of buying my first house (currently living in an apartment). Even though, this house is suppose to be my primary residence. Could I, instead, lease option this house to a TB? Are their any repercussions to turning my primary residence into an investment property?
Thanks
Obviously you are not comfortable with that choice or you would not ask it here. The answer is simple, Do you think that it is ethical?
Let me be a little more blunt that Mdhaas, NO, IT IS NOT ETHICAL! Worse, if you are getting a loan on the house and telling the lender that it will be owner-occupied when in fact it is to be a rental - THAT IS MORTGAGE FRAUD! I wouldn’t suggest starting your investing career with a criminal act.
Mike
No; Enough said.
Thanks everyone,
I will move in but I was thinking “What IF?”. On the other hand, I am learning a lot about the home buying process. Things are a bit different when you are actually doing something.
Also, I learned that I can increase by W-4 allowances to help compensate for the higher payments, since the house is producing tax writeoffs.
Thanks
at closing, you will likely sign a document that states your occupancy intension. Some of these statement even have a time associated with them of 12 month.
thus, later if the lender gets wind of you not occupying as a primary residence, you will clearly be guilt of fraud.
I have to disagree with this…I’m not commenting on the intention of buying to rent out (illegal and unethical)…
Rather, with the time association of the occupancy intention…I worked in the mortgage industry for 6 years (in the finance dept., not an LO)…The first house I bought while working there was a house my wife and I were going to move into since it was 40 miles closer to my work (I made a 42 mile one-way commute for all 6 years!), even though it was a further drive for my wife, but it was her turn to make the long drive…Just before closing (days), after having a lot of our things boxed up, advertising our principal residence for rent, etc., my wife decided that she didn’t want to move out of our house (one of the wonderments of marriage - the wife’s opinion!!)…
I spoke to my LO - one of the founders of the company (an Inc. 500 fastest growing company) - about it and he told me there’s no “mortgage police”…I could always say that after taking another look at the neighborhood (one of the very finest in Virginia Beach), or after spending the first night there (which never existed), I decided not to move in, blah, blah, blah…My rate terms wouldn’t change, I wouldn’t be going to jail, etc…
Was this mortgage fraud?..Kinda, sorta, maybe, but not really…If I did it a second time, THAT could be a different case…
In other words, I don’t buy into the length of time that somebody HAS to live in a place before renting it out…Circumstances could always happen that dictate that you need to stay put in your original house or move somewhere else immediately…But a “habitual offender” is a different case…
Just my personal experience with it…
What made you decide to buy when you said that your cost of ownership was double your cost to rent?
Did it turn out that buying is cheaper than renting?
Actually Dave it is going to cost a lot more to buy than rent. I recently found out that I can increase my W-4 allowances to “capture” the tax benefit of the new house on each paycheck. And my first payment wouldn’t be due until March of 2008. But I was thinking that I was going to start buying and leasing optioning houses. And this would help compensate the higher payments. I thought that since I was buying a house with at least $20K equity that this would be a good deal. But the payments would be about 3 times what I’m paying for rent now. So, adding the “tax benefit” with what I currently pay for rent comes up to about $700 short of the “PITI” payment.
In other words, “I MESSED UP”!!!
My first mistake was assuming that I would compensate for the difference with money I currently don’t have (i.e. future REI property). And I “probably” could make up the difference. But nothing is promised. So I’m going to just start investing and building up my capital.
My second mistake was see first mistake. My first payment isn’t due until March. And surely I can get a couple of properties by March. But like I said nothing is guaranteed.
My third mistake was assuming well I could stay in the house for a "little’ while then L/O it. But I guess that’s FRAUD.
I’ve been learning a lot in the past few months and I’m anxious to start “actually” doing something. But I didn’t do enough “due diligence” on this house and made too many assumptions.
I’m probably going to canceled the contract and just take my loses. I hope there’s no further repercussions from walking away except for the “earnest money”.
How much will you lose if you cancel the contract? Are you under a hard contract yet, or is your deposit still considered a reservation fee? If you cancel the contract now, can you get your money back?
If the amount on deposit is substantial and you can’t get it refunded, then consider how you might still make the deal profitable.
Since this property won’t cash flow for you as a rental, can you afford the monthly housing cost if you owner-occupy? Hold for two years as a primary residence, then sell for a tax free profit.
Under the current tax law, you could sell on a 24 month lease option if you wish and still keep the sale profit tax free as long as you meet the two of five year ownership and occupancy tests.
Use your tax free profit to acquire cash flowing rental property.
Another option available to you now is to proceed with your plan to purchase to flip. Will the lease option deal still give you a net profit when all is said and done? Will the option consideration, the interest rate spread, and the back end profit add up to a profit when the option is exercised? Your current housing cost for renting your apartment does not figure into the calculations. Run the numbers as a stand alone deal.
If a lease option deal still makes sense, then proceed with your purchase but tell the lender that you have changed your mind about the use of the property. Tell the lender that you no longer want to owner occupy the property. The lender may still give you the loan at the same interest rate, just changing the down payment and maybe charging a point for loan origination.
Unless your earnest money deposit is a nominal amount, don’t just walk away until you have explored all your options to still profit from the deal.
Note, that under current law you can occupy your primary residence at least two years, then convert it to a rental for a couple of years prior to the sale and still keep the sale profits tax free. This may change under proposed legislation the House has already passed. Under the proposed changes to the tax code, your “rental period” will reduce the amount of your sale profit that would otherwise be tax free under the current law.
The earnest fee was $500, but I don’t know if I can get it back.
The only way that I could afford the monthly payments and live “comfortably” is to get in the REI business to help with the mortgage payments. This is a risk I may be willing to take. Also, my first payment want be due until March 2008.
This market is too “soft” and their are too many homes on the market to flip, I think.
So, I think my best options are to either get in the REi business and live there or walk away. Besides I need more room.
Thanks Dave for the different options
Thanks buffinvestor for sharing your experience
How many bedrooms does the house have? maybe you could rent out a room to a friend for cheap which would help pay the mortgage. My wife did that with her first condo, it helped to have another 500 bucks every month.
From what I understand the laws say that you are required to live there for 30 days before you can turn around and rent it out. This is in order for it to be deemed legal when you called it your primary residence. Also, if you go that route, make sure you have your license switched over to show the new adress, so you show a paper trail.
buffinvestor,
Your posting says a lot about your integrity. You have to sign an affidavit of occupancy at closing nowadays. Just because there are no mortgage police does not mean that it is ethical. Thats like saying “the police don’t care if you rob a bank as long as they don’t catch you”. Your personal experience with it is that you committed fraud, did not get caught, and now your intimating to other people that it is okay to do as long as you only do it once. I find it very difficult to believe that a lender would buy the "I spent the first night, but did not like it "excuse, and neither would the judge.
I spoke with the lender today and asked her point blank, If it was okay to live in the house for a year then rent it out. She said that she understood that things happen i.e. job transfer, etc. So, I got the feeling as long as I moved in, then I could do whatever I want in a few months. This is good especially since the first payment would be due in March. She also mention that she would rather not know what my plans are. So I took that to mean that I shouldn’t be mentioning that AGAIN.
So, one option is to move in after closing, but keep my apartment in case I decide to move back.
I’m taking donation for the mortgage.
She also mention that she would rather not know what my plans are. So I took that to mean that I shouldn't be mentioning that AGAIN.
Sounds like she doesn’t want to involved in your fraudulent activity. No matter how you want to justify it, you are still commiting fraud.
So how long should I stay in the house before renting it out?
Chris - I figured what I wrote would raise a few eyebrows…Like I mentioned at the end, it was just my experience with the situation - not trying to tell somebody how to beat the system…In my own case, it was an honest purchase with the intent to move but the wife said “no” just days before the closing…I was in a high position in the company, my boss’s father was my LO, and I thoroughly discussed it with him before not cancelling the contract…My LO wasn’t the least bit concerned about losing his fee (he has tons), the real estate agent was HIS best friend (also doesn’t need the bucks), but for all concerned we decided to go ahead and do the deal…
As for any “law” stating that you have to live there for a certain period before renting it out, there is none that would pertain to your “first” second house…You legally can stand out in front of it when ready to move in and change your mind about living there, and go ahead and rent it out…And as I said, if you did this more than once, then there would definitely be questions raised…And if you had the INTENTION of renting it out (and actually do) but get a loan based on moving into a new personal residence (i.e., lower interest rate, down payment, etc.), then yes, it IS mortgage fraud…
My intentions is to live there. But I’m just trying to learn all of the options I have with the property. If it is fraud to rent out the property, then I will not do it.
Buff,
You finished your own sentence. You knew in advance that you were not going to move into the house, but closed on an owner occupied loan. So by what you explained above you, your LO, and your realtor were all involved in “conspiracy to committ mortgage fraud”. Now at this point I really don’t care whether what you did was right or wrong “in your opinion”. What I do care about is that you come on this board on which I am a moderator and give newbies advice that is tainted. Please refrain from doing this in the future as it cheapens the integrity of this web-site as a whole.