How to rent out my own house and buy another one?

Question

We are owners of a home in Kansas City, MO. We've owned for about 7 years, but need to move to the Kansas side for school. Friends of ours have offered to lease our property so we don't have to sell in this depressed market. I'm very tempted but ideally want to buy another home right away, since rates are awesome and house prices are too. However, the bank we have our mortgage with doesn't want to give us 2 mortgages, even with our lease agreement in hand. There has to be a way around this...anyone know what the trick or approach is so that I can go ahead and buy another home now? Thanks ahead.

Jon Holdman · Answer

First, DO NOT stop with just talking to "your bank" about loans.  Banks are all over the place on this.  A good mortgage broker can be a real asset because they will have access to a variety of programs for different situations.

Nobody can just transfer a house to an LLC and "free up income".  Maybe once upon a time you could create an LLC and have it actually get a loan.  That's really, really tough now and almost certainly requires you give a personal guarantee even if you can get the loan.  You're also looking at commercial loans, which are at a higher rate and shorter terms.  Many commercial loans right now are being written with 3-5 year balloons because nobody want's to commit money at 5% for 15, 20, or 30 years.

People do put properties into LLCs for various reasons.  That's mostly for asset protection reasons.  I.E., you get sued by a tenant and they can only take the assets of the LLC that owns the property.  If those assets are one mortgaged house, there's little to take.

Twice you've written things that make you think you are confusing ownership and loans.  When you apply for a loan, its your loans that matter.  You generally can't get a mortgage on a property you don't actually own, though.  OTOH, you can easily end up with a loan on a property you don't own by transferring ownership to someone else.   But the loan is still your problem and will still affect your ability to get a loan.  So, moving a property into a LLC (i.e., creating a deed granting ownership to the LLC) won't affect the loans.   Only doing a refi will change the loan, and the bank will almost certainly require a personal guarantee.  That loan might not show up on your credit report, but if you apply for a loan and neglect to mention it on the loan application, you will be committing loan fraud.

Jon Holdman · Answer

Transferring the title (ownership) of the existing house won't change the loan.   You'll still be on the loan.

Unfortunately for you, banks will insist that you be able to qualify for both loans without any consideration of the rental income.  That's because it was very common for people to buy a new house then let the old one go into foreclosure.  So they now want to be sure you can afford both.  After a couple years of lease payments (i.e., rental income on two tax returns), you can start using that income.  If you try some smaller lenders and credit unions you may find someone who would be willing to do it sooner.

Realize that you bought at the height of the bubble.  Our current market is not a down market.  Its a normal market.  The unusual market was that bubble.  Its highly unlikely, IMHO, that your house will be worth significantly more two, five or even ten years from now.   If you need to sell in order to buy another house, just go ahead and sell.

Are you prepared to never, ever have a civil word with your friends again?  Hopefully them renting your house goes fine.  But you're changing the relationship from friends to landlord/tenant.  That relationship can be tense at times.  Are you prepared to put them out on the street if they can't pay the rent?

Also, realize that renting is not the worst thing in the world.  When you buy you're renting money by paying interest.  There are lots of places where you will spend less money on housing by renting than by owning.  Admittedly there are many intangible benefits to owning but it can sometimes be more expensive than renting.

Kan Grrl · Answer

Thanks Michael. If we do rent it out, I'd definitely refi first. Selling does sound WAY more appealing at this point, even with taking a loss. Feel confident we could buy into a new place for a song.

Michael Seeker · Answer

If your husbands current income will support you guys moving to the area you want to move to, and you have enough money saved up (plus potential equity in the house) then you need to sell for a loss and go buy where you want to be.

This is a common theme among sellers today, you THINK the house is worth X and buyers think it is worth Y.  The truth is, it's worth Y.  It doesn't matter a bit what you paid, spent or think it's worth.  The true value is what somebody will pay for it.

That being said, if you think your house won't sell for what you think it's worth, the bright side is that the houses where you are wanting to move are probably in the same situation (sellers THINK their's are worth more too).  So when selling yours it sucks, but when buying the new place, you should be in luck.

ABSOLUTELY, POSITIVELY, DO NOT RENT YOUR HOUSE OUT WITH AN ARM.  You are just begging for trouble if you do that.

Ask the realtor what the house will sell for, tell them your time frame, and get it listed/sold.

Kan Grrl · Answer

Ok. I'm going to give you more deets on my house and situation. If you were in my shoes, what would YOU do?

Own one ranch home 2 bd, 1 ba, 2 car gar, full concrete basement, huge .25 acre level lot , purchased for $137k in 2005. Sunk about $30,000 inside, it looks absolutely magazine perfect w/ new bathroom and kitchen (granite, limestone tile, the works), was inspected in 2009, no issues. Had offer in spring 2009 for $150K, but buyer's financing fell through at last minute. Tried to sell "by owner" listed at $148,500 but no hits that summer. It's been off the market since then. We owe $123K on our mortgage still, so about $15k in equity.

We live in a very trendy, desirable, young neighborhood and good houses still sell easily. There are a few short sales near me, similar houses, which might pull my price down.

My mortgage (which we got in 2005) is an 80/20 ARM. The 80% is sitting at 3.8% and adjusts each year. The 20% is a home equity loan and is at 7.25%. My monthly payment combined is about $950. I know I could save from refinancing, but since we've always been intending to move- didn't think I could reach a break-even point to make it worthwhile.

So now, we want to get out. Could get $1000/mo in rent. Realtor is stopping by tonight with comps to talk about pricing.

What would you do?

George P. · Answer

The thing is until you are a landlord for two years, the bank will underwrite YOU not the property. It means you gonna have to qualify  with your income, credit, and assets.

Kan Grrl · Answer

Many good and sobering points Jon, esp the point about how we are actually in a normal market. I've resisted refinancing for a few years, thinking we would sell soon and lose the break-even. More than ever I'd like to sell now, take the hit, and buy into a nice new rate on my mortgage, then pay off the house in 15 years (or sooner). I'm thinking this may be a better approach than renting out our current home. With 2 little kids and not much spare time or $ to chase tenant issues.

Tim, your point about not being able to get 2 mortgages is what I recently discovered from our bank as well. Friends of ours told us they knew of ppl who created an LLC to shelter their assets, and transferred the house to the business, thereby freeing up their income to qualify for another mortgage. This wasn't explained in detail to us, and sounds rather "too good to be true" but have you heard of such a thing?

Kan Grrl · Answer

Smart idea...I like it. Problem is, I just became a stay-at-home mom for the time being, therefore only one income (my husband's). Could I transfer the title to another family member, then try for house B?

Mark Updegraff · Answer

Refi house A in one of your names. 
Qualify the other for house B.

That is the easiest way IMO

How to rent out my own house and buy another one?

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