Converting primary into a rental?

Question

Hey everyone, first post! Anyway, I feel pretty knowledgeable in this as starting out as I have read the books and had mentors etc. for a few years gearing up, BUT, I have ran into a problem I have not found a good solution to and my mentor is now deceased. Scenario - I own a home and also own 10 acres, I use the term OWN loosely. I am trying to figure out how I can get my current primary residence rented and buy another house or multifamily home and not go under during the process. I was going to build on the property out of pocket and move to that but lumber price's have stalled that for now. I considered a 5th wheel but I am also married and have 2 kids, 3 dogs, 2 cats so its not exactly feasible and do not want to take on another liability in the form of an RV. Have any of you done this before? The options I have thought up is to set aside 6 months of mortgage payments for the house, buy another house and hope that the other rents before I exhaust the 6 months of vacancy. Other option, put it up for rent and when someone signs a contract, I'll move us into a cheap rental while I find another house to buy. What are your thoughts?

John Mocker · Answer

Jeremiah'

Anna has a good point on the insurance.  Once you move out, virtually all Insurance companies will want the Homeowners policy to be changed to a form for a rented dwelling (most commonly called a Dwelling Fire policy).  Check with your agent and/or shop for the pricing of that new policy to factor that into your calculations

Anna Laud · Answer

@Jeremiah Lewis

Hi Jeremiah!

It seems that you're right in an RV not being an ideal fit for your family's size, so I too would scrap that thought. In having six months of cash reserve saved up for mortgage payments- that's a good plan to simply set aside as much as possible.

If you know current rent rates in your area for the home you're thinking of renting out, you can probably project rental income vs. mortgage payment amount. Now, with this in mind, you should be able to tell how much of a loss you'll be at each month.

Meaning, if you're renting for $900/mo and your current mortgage is $700/mo, you're $200 ahead, minus another rental for your family's needs of $900 (assuming you'll be renting same-ish size as one you're looking to rent out now) = -$700/mo so this would be pulled from the cash reserve amount or monthly income amount. Obviously a loose projection, not taking into account rental expenses, assuming you'll serve as PM, you second renter's insurance etc.

One thing I would advise against first is moving forward without getting in touch with your current lender and insurance providers- renting the current property out may change terms in some cases and you need to be fully transparent in plans.

If you're set on building on this land, it seems you may want to get pricing figured out in a more for sure approach (as you can, I realize material pricing right now is not 'normal') to get an idea of how much you really can afford to build. IF it turns out that building is simply out of budget you may need to look at already built homes.

I think your first step should be getting in contact with your current lender and seeing what you would qualify for in terms of financing at this point, then delve into the realm of new construction loans pre approval once you have a ballpark of how much a new build will cost.

From here, assuming you get pre approval for a new construction loan, moving into a cheap rental would be one option- I would be cautious of where if you have school age children; in some districts the mailing address must match the home address for the children to attend the same schools as now, and I doubt you would want your tenant receiving anything from the school as it pertained to your children in terms of privacy if you tired to get around this by listing current address as home and mailing address. This will also impact bus routing, and it's not unheard of for a driver to radio in that children were dropped off at bus stop, not coming from house and we've dealt with superintendents following cars home from bus stops to verify actual home addresses in highly sought after school districts. Not a mess you'll want to deal with.

Once you have financing in place, and it's determined affordable, it seems the rental would work as an 'in the meantime' home until the new build is ready.

If it turns out that it will be more affordable to purchase a preexisting home (again, financing in place), then it may eliminate the need for the rental altogether, simply by moving and then renting out your current home.

One suggestion here would be to maybe consider the placement of a modular home on a portion of the 10 acres not needed to build on. If you're taking into account the ballpark number of $900/mo (or whatever you're planning on paying in rent) x 24 months (just an average based on new build timelines and playing the waiting game with material pricing etc) that would be about $21K ish- or about half or 1/3 of the cost (this will be area specific to you of course) of a small modular home maybe.

If you have this kind of cash now, it might be easier to get a small/cheap modular home set up while you await the new build, then have 'two doors' to rent on your land than the one alone after you move from the modular home. In theory, you would have two rental incomes then to cover first loan payment and help with second loan payment on new build.

Third (I think by now ha) option is to sell off some of the acreage to a developer and make as part of the negotiations the building of your new home in terms of a discount maybe. 10 acres would accommodate current home, a modular home, a new build and maybe selling off a few lots it seems. Even if you bypassed the modular home route, this would add to cash reserves at least.

Hope this helps some!