Turn my Primary Residence into Investment Property?

Question

Hello,

My wife and I are wanting to purchase a new primary residence here in Denver but instead of selling our house we’d like to turn our current primary residence into an investment property. We have a low interest rate and a relatively small balance on our home now and we’d hate to let go of that.

Projected monthly cashflow for the investment property should be $1858 (we have a super low mortgage payment and rents have gone way up here).

Moving into a new primary residence is going to bring us a mortgage payment of about $1500 more than what we’re used to paying on our current home. The risk here is we are relying on rents to stay the same (at minimum) and for our tenants to pay on time each month or else we can’t afford to pay the mortgage on the new home.

Is this too risky? Would it be better to just sell and move all the equity into a new purchase and not have to rely on cashflow from an investment property to make the payments on the new property?

Any insight is appreciated!

David

Ryan Williams · Answer

@David Lemont Hey David, everyone else has made great comments so far. I'm not sure if I'm following you 100%. If you are cashflowing, your net profit would be $1858, you should highly consider making that property an investment property. Having a cash flowing property like that in Denver is what everyone wants! Paying more on a primary is ok, because the cashflow will mitigate that increased payment, so your monthly budget will come out to close to the same, but you begin building equity and appreciation in a great market on two properties. If you can have a cash flowing property in Denver, that's generally one of the best moves you can make!

Tanner Pile · Answer

Hi David,

I turned my first property into a rental as well. I don't completely rely on the income from it to pay my entire mortgage for a preimary residence though. Is this the only way you will be able to pay for the monthly mortgage on your primary residence? Even if it covers more than half and you have revenue from another source (another asset or job) this is great!

So $1850-$1500 leaves about $250 extra that you could put towards your vacancy, unpaid or late rent, and capital expenditures. I assume you already calculated this in to the original expenses for the property? adding this $250 to the property savings can add a great cushion for any un expected situation for you to cover. I believe from what you've stated it will accomplish your goal well of using the cash flow from one property to cover the mortgage of your new primary residence.

Good Luck!

Greg Weik · Answer

@David Lemont underwriting is a challenge when it comes to acquiring additional properties.  The two-year rule is very common and from my experience, not something very easy to get around.

It might sound counter-intuitive, but have you considered renting something to fully set the clock on your 2 (soon to be 3) rental properties?  This is a tough time to buy, with interest rates what they are, but if you can position yourself to be ready to pull the trigger on another house in two years, my crystal ball tells me interest rates will cool down and house prices will have leveled or even dropped in some areas by then.

Whatever you do, don't try to sell your current primary home.  This is the worst time to sell I've seen since 2008 and it's not getting better anytime soon.

David Lemont · Answer

Thank you everyone for your input! So my wife and I went to apply for a 30 year fixed rate conventional on a new primary residence, with the intention of turning our current primary residence into an investment property. Our lender came back and said our debt ratio is way too high at .77 (the target is around .45). We have virtually no credit card debt, our vehicles are paid off, etc. We have 2 other investment properties but we started renting them out less than 2 years ago. The lender said they want to see 2 years of rental income on our tax returns before they can count the cashflow we’re getting from them. We talked to another lender and they are saying a similar thing. Is there any way to find a lender that will help us so that we can keep our current primary residence and turn it into an investment property?

Kenny Smith · Answer

@David Lemont

All great points provided above!  One other thing to consider is maybe looking at a medium term rental to maximize cash flow even more?  It would be a little more involved seeing you'd have to furnish the place.  Depending on where it is in Denver, travel nurses are an excellent tenant pool to target and can make substantially more than an LTR (given it is a nice property, in a good location, near hospitals, etc.)

Let me know if you have any other questions, and good luck!  Sounds like you'll crush it.

Kayla Givens · Answer

Hey @David Lemont! Similar to Ryan's question - is the $1858/mo cashflow after all expenses/PITI? If so, I say GO FOR IT! You don't see cash flow like that in Denver on long term rentals anymore and if you can safely build up your reserves in case you have cap ex or a tenant that misses a month, you're going to be in a really great place. My advice would be to get a good tenant screening process in place so you can do your best to avoid sticky situations like that. Your equity and appreciation will only continue to rise in this market so I'd hold on to that property if you can.

Have you thought about house hacking to offset the $1500 difference for your next primary? You may not want to share a living space with someone but it's possible to find a property that can be split into two living spaces and reap the benefits of having a lower monthly payment :) Just my two cents!

Chris G. · Answer

@David Lemont

Would you be managing the property yourself? Or taken into consideration the maintenance costs in case something breaks. Is there anyway in particular you figured out that rent price or just other homes around the area are going for that much. It's hard to say in your case because if you're advertising yourself and screening tenants yourself it may take longer to rent/ find a qualified tenant. If all of that has been taken into consideration it sounds fine. Like a few others have mentioned though rent being paid 100% on time and full occupancy is hard to get perfect there may be a few months of vacancy or late rent.

Taylor L. · Answer

That would be much too tight for me. You're going to have vacancy, late, or unpaid rent on occasion. Investors control for that by vetting tenants thoroughly, but if a late rent payment is putting your personal residence at risk that much, I say find another way.

Consider your return on equity. If everything went well, what would your return on equity be?

Turn my Primary Residence into Investment Property?

Most Popular Reply