Becoming a landlord primarily to establish rental history

[Steve Ellison]

About six months ago I posted about my situation and got some good advice.  Now that I’m ready to actually do something about it, I’d like to run it by everyone again with a little more detail.

My goal is to buy a new house in 18 months.  I am currently underwater on a condo I bought in 2007.  The cost to sell the condo is approximately the same as a 20% downpayment on a new house.  I can afford to do one of those, but not both.

I think my best move is to rent out my condo ASAP, and move into a temporary rental myself, so I can begin my rental income history ASAP.  And I say ASAP because an appropriate rental for me to move into just became available.

Here are my assumptions:

• The condo will be fairly easy to rent
• The rental income will only cover 75% of my monthly expenses on the condo (mortgage, taxes, HOA fees) but I'm stuck paying those regardless.
• The rent payment for my new place, and the rent I collect, will be the same on a monthly basis (break-even)
• Repair/maintenance costs will be the same whether I live in the condo or rent it out (break-even)
• I will incur new costs for professional management and potential vacancy
• The condo is in a good location and I won’t be underwater in five years
• My front-end DTI is 28% and I have excellent credit with no other debt

Here are my questions:

• From what I’ve read, there is some variation in what lenders require to use rental income to qualify for the next mortgage.  How likely is it that I’ll need at least a year of documented income?  Are there factors within my control or specific to my situation that influence this, or is it purely based on lender policy?
• Generally speaking, what are the tax implications?  Currently I can take the mortgage interest deduction on my primary residence.  In the rental scenario, I will have to pay income tax on the rent, but the mortgage interest deduction is the same right?  Plus I can deduct the management fee I assume.  Can I easily calculate how this affects my bottom line?
• Even though I plan to break-even on the monthly rent, I understand I will be losing money on management fees, potential vacancy, and possibly an increased tax burden.  Is that correct and/or am I missing anything?

Renting out my condo, and moving into a rental, will cost me some money and will be inconvenient.  I am willing to sacrifice convenience – and also some money – if it has a big impact on my ability to qualify for a mortgage in 18 months.  I would really appreciate your feedback about whether I’m missing any risks and whether it’s worth going down this road.  Thank you very much in advance.