What should I be aware of when buying a home, renting it out for 2-3 years and then moving into it?

Question

I want to buy a home without moving into it for about 2 to 3 years. I currently own my home, paid in full, have excellent credit. I will need to finance the 2nd home. Should I use the equity in current home or finance rental? What happens when I stop renting it out and decide to move into it? What possible problems could exist?

Answer 1

The newly purchased property will be a investment property for purposes of financing. The hits for that start at a point and a half, and *nobody* does 100 percent financing for investment property.

Depending upon the relative costs of the two properties and how much you have for a down payment, you could be better off taking some of your equity on your current property for a down payment, but be aware that the loan costs on the investment property are a direct charge against rental revenue, while the loan on your owner occupied property is only an itemized deduction on Schedule A.

When you do occupy the property, it is likely to be cost effective to refinance the loan, as owner occupied rates are lower than investment property rates, other things being equal. Similarly, assuming you don't plan to sell your current residence and haven't paid it off, you want to get yourself a good long term loan on it about a year before you do move out, as most owner occupancy loans require you to live in it for a year after the date of the loan. The lenders usually don't go out of their way to check, but there are all sorts of things that can bring it to their attention if you don't occupy it for the relevant period, and you do NOT want the consequences of that.

Answer 2

On the financing of your intented investment property,
check with an accountant in your jurstiction, but in our country (canada) it is how you use the funds that determine if the cost of borrowing is deductible, so if the funds are used to buy an investment (the 2nd property) the interest and operating and maintenance expenses are deductible. It will be more of a question of structure and comfort, if you work with a good mortgage broker, that understands what you are doing, they will be able to put a great financing package together for you.

on buying with the intent to renting it out, as mentioned before, be sure to check referrences, and check them 3 deep, meaning to check the referrences, then ask the referrences for more referrences, of people that also know the applicant, check those, as well ,and ask them for more referrences, and then check those, this last level will give you the best insight of the true nature of your applicants.

when you end up moving in to the rental home, it now becomes your personal residence, and if you sell your past residence at the same time, you may be exempt of taxes, check your local accountant. But if you start renting it and then sell it at a later time the gains will likely be taxable.

This method is often used in our are, so we have a lot of experience with this, we recommend that owners hire or find a local person to chek int to the property at least once a month by an on site visit, ( possibly inside of the home).

We have had a number of Pot growing situations, where tenants appear to be great, rent homes for a long period and destroy the inside of the home and starting a grow op inside and with the high humidity destroy the home from the inside out, without any signs being obvious on the outside, what typically gets them is the hydro consumption, and their own arogance.

This would be the extreme, in most cases if you have done your home work on cheking referrences, and monitor the property, you should not have any major problems, other than regular wear and tear.

Good Luck

Answer 3

Dont use ur current equity, u want to be able to negative gear the rental income for tax purposes. Get a loan and all interest etc is a tax deduction.
Also ( I learnt this the hard way) vet the tenants properly, ask for references, check them properly, make sure they are in full long term employement, find out if they have animals etc. You cant check enough. I once had a landlord tell me they were great tenants simply so he could get rid of them cos they were so bad!! luckily I understood the Italian he and his wife were talking in the background.
Expect some wear and tear as this happens in all homes, but anything major should be covered by the bond.
Once u move in provided u live there for a certain lenght of time (check ur local tax office to find out how long) u shouldnt have to pay captial gains tax

Answer 4

Nothing, you just need to be prepared that you will have some repairs on your hands when it's finally time to move in.

If you are renting it, I would try financing it, and leave the equity you have in your current home, if you can swing that. If you know how to correctly charge for your rent, it should be giving you positive cashflow, so there's no need to leverage your current home....again, if you know what you're doing.

Carrying another mortgage will not be a problem if you state your intentions that it is to be an investment property.

Answer 5

Your definately going to end up paying more for your mortage if you purchase the home non-owner occupied. If you find a tenant after you buy a home, ask your real estate agent to check their credit, and you do a backgroud check. Depending on the landlord laws on where you live, ask for a first, and security deposit.

Good luck.