Buying new home, converting current home to Investment Property. What is the best way to do this?

Question

I currently live in a 1100 Sq. Ft. house in a small neighborhood. I purchased the house 3 years ago for $122,000 and still owe approximately 95% of its value. One of my coworkers is retiring and moving to Florida. She wants to sell me her house for $65,000 and be done with it. The new house is larger than mine and on a bigger lot outside of the city. I would like to move there.

My current house is near a military base , and in a neighborhood commonly used as rental property for soldiers. I would like to turn my current house into an investment property.

My grandmother learned of this plan and is considering taking a lump sum from her annuity and buying my current house outright, so I can mortgage the new house.

My main questions:

• Would in be more profitable for her to withdraw the lump sum from her annuity and pay the tax penalty than for me to take an investment property loan?
• I live in a three member household in which I am the only earner and have an effective tax rate under 5%, she is retired and lives alone. Which one of us should purchase this house on paper?
• If she buys the house from me would there be any need to involve a Realtor? It seems silly for an inter-family transaction.
• Would it be better to outright purchase the $65,000 house and move there, then maintain the mortgage on my current property while renting it?

TL;DR: Is it better to take a tax penalty on an annuity distribution or pay interest on a loan?

Thanks for your time.

Kyle Hipp · Answer

answering your question from earlier as well.

1. It would be much better to get an investment loan than to withdrawn funds from a pension or annuity and pay the penalty. But in your case it should not be an option, it would be between getting a normal owner occupied mortgage on the new house or paid in full from grandma, which would be even cheaper with the owner occupied mortgage.

2.As for who should buy the house, it should be whomever the owner will be. Does you grandmother want the responsibility of taking care of a property? If not you should be the owner, set up a mortgage or note of some sort if you use grandmothers funds. Unless your grandmother has a very high income you would most likely benefit more from owning the rental property tax wise.

3. You do not need a realtor. Simply get the offer to purchase form and the proper disclosers and get in contact with a title company to do the closing. You might need to pay to get the right documents and fill them out correctlt but that should be a couple hundred bucks at most. A lawyer would also offer this service.

4. Yes it would be best to leave your old property financing as it is and justchange your home owners insurance to reflect its rental status. For yiur new house you will spend less money and you could even get a "gift" from grandma to finance the down payment on your new property to obtsin financing.

Kyle Hipp · Answer

Did you attempt to get prequalified for a mortgage? I would go sit down with a mortgage broker or two or three and see what options you have to finance your new house. I would really just leave your old property alone from a financing perspective. If you need your grandmothers assistance use that towards the new house you are purchasing.

Another option you have is to do a land contract on the new house from your coworker, set up the terms and agree to pay him off in full in 25 months. You can put money down to the seller and set up your ammortization however both of you guys agree to. The reason that I say 25 months is at that point you will have 2 years of landlord experience under your belt and will easily be able to use your old house rental income onto your own in order to refinance you new house with a bank.

I think you are making this more complicated than you need to not to mention the expense that your grandmother would incur. I know I would feel very uncomfortable letting my grandmother do such a thing for me as if yiu can't make it work for whatever reason you grandmother does not have as many tools to make up for that lost money. I would explore fully every option to the fullest extent before even considering her cashing in an annuity.

Kevin Bridgeman · Answer

That's what Grandma was thinking. I probably won't qualify for a second mortgage, but she could purchase the property and allow me to mortgage the new house.

As far as the land trusts, This Article outline some of the laws concerning them and it appears my state does not recognize them.

Michael Lemieux · Answer

I am in a similar situation, although we have substantial equity in our current home. We were hoping to refinance our current house, pay off the existing mortgage and convert it to a rental. I was told that I would not qualify for two mortgages, even w/ the first house rented.

Personally I would go for option 4 on your list. I also think if you place your current property in a land trust, then it will not show in your name on the tax log and may help you w/ qualifying for the second mortgage. I'm going to do some more research on that possibility for my own purposes.

Kyle Hipp · Answer

I recently moved from my first home and bought a new home for my family to live in and rented out my old home. You do not need to refinance your old home or anything. You just purchase your new home and move there and rent out your old home. You will need to change your home owners insurance on your old home to reflect that it is a rental, which will most likely be cheaper as you will not need to insurance your personal belongs there at least to a larger extent. I do not see a need for your grandmother to need to cash you out for any reason. Maybe there is something I am missing as to why you would need this?