I will be purchasing my first rental property and I own my primary home outright with no mortgage. The property costs $210,000 and my home’s value is 465,000. I am not sure what the right way to finance this would be. I could take out a conventional investment fixed rate mortgage that seems to have a slightly higher interest-rate than a regular mortgage. The other thing I am considering just taking cash out refi on my primary home to pay for the rental property in full and then subsequently expensing the mortgage on the rental as it will be used to fund my rental. If I did the latter, would it be two different closings and two different sets of closing costs? What would be advantageous and why would one choose one option or the other? Thank you very much for everyone’s help.
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
7y
I would talk to an investor-friendly lender and ask them. They'll know all the rates, your qualifications, and all of the options in general. They'd be the best ones to give you actual numbers. I could give you guesses, as can probably a lot of people on here, but it'd be faster and more accurate to just go straight to the horse's mouth.
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
7y
I would talk to an investor-friendly lender and ask them. They'll know all the rates, your qualifications, and all of the options in general. They'd be the best ones to give you actual numbers. I could give you guesses, as can probably a lot of people on here, but it'd be faster and more accurate to just go straight to the horse's mouth.
@Cameron Tope I am not talking about income. He can deduct the mortgage interest if he buys the investment on its own mortgage. If he takes a cash out refi on his primary home, I think he can only deduct 25 or 50K from it (assuming it hasn't changed due to the Ryan tax plan). He would need a business setup and issue a personal loan with interest to be able to deduct it.
If you pay mortgage interest on your primary residence, that's deductible on your personal taxes.
If you pay mortgage interest on your investment property, that's deductible on your business or personal taxes.
It's a common misconception that you need an LLC or other entity to write off expenses related to rental properties. Speak with a local CPA and he/she will tell you the same thing.
I'm not sure on the details of a Ryan tax plan, but when you do a cash out refi it is not taxed as income and if you use that money as a down-payment for a rental, you'll be able to deduct all the normal expenses that come with owning a rental.
@Cameron Tope If you take a mortgage on your investment home, the interest is deductible up to $1m. If you take a HELOC to payoff the investment, the HELOC interest is not deductible (Ryan/Trump took that away). If you do a cash out refi, the interest is deductible up to a certain point (I am pretty sure it is 50K for married). It is not an income, you can only deduct the interest.
Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
7y
@David Tecchio
You would pay closing costs, on any cash out refinances or purchases. Rates have dropped recently so it is worth taking a look to see if you could drop your current primary home mortgage’s rate with a cash out refinance.
There are multiple things to consider like what you owe currently and what your rate is? If it is going to increase your rate much more than your current rate, I would consider doing the conventional purchase of the new property. If you are considering buying more properties in the near future and will need to cash out sometime soon, it may be good to cash out now while the rates are lower.