All Forum Posts by: Casey Martin

@Casey Martin  The comment above about your Mom selling tax free is definitely something I'd take into consideration if nothing has changed hands yet.  

From a mortgage perspective, it sounds like you might have enough room in your DTI to make this work if you don't have much other debt besides the student loan and the mortgages, although I have no idea what your current interest rate is, or your property taxes / insurance, or whether all your income can be counted. For that, you'd definitely need to talk to a loan officer licensed in your state to review your financials.

Here's what I'd suggest:

1.  Cash out refinance on the gifted home - you will need to be on title for 6+ months to qualify for a conventional cash out refinance.  You can borrow up to 75% of the value for a cash out refi, and can use 75% of the rent to qualify.  You will typically need to show the lease and first month rent / security deposit to use this income before it's reported on your tax return.  

When refinancing, any debt that will be paid off with the loan proceeds can typically be omitted from your debt to income ratio.

2. If you can show that your Mom has insufficient income to qualify for a new mortgage, you may be able to take advantage of Fannie Mae guidelines that allow you to buy a home for your parent(s) as a primary residence. This will allow you to put a minimum of 5% down and you would get the better owner occupied loan interest rates. Since you would not be buying this as an investment property, you cannot use any rental income to help qualify for the purchase loan, and you would need to qualify this additional mortgage payment (principal, interest, taxes, insurance, HOA). If you buy as an investment property, rates will be higher and you will need a larger down payment.

So, first you need to be on title to your Mom's home for 6 months.  Then it needs to be leased, then you can do a cash out refinance.  Once you have paid off your debt, have the home leased and you have your down payment funds, you can buy the new home for your Mom to live in.

Obviously before taking the first step, consult with a tax advisor to see if they recommend a better option, and also consult with a loan officer to plan out the scenario to make sure you will qualify for each loan. 

As a private lender, I would do the following:

1. Transfer your mother's house into an LLC and rent out (likely as an LTR)

2. Take a DSCR cash-out refinance on your mother's house with a hard money/private lender. They will not use your DTI to qualify you, only the DSCR (essentially monthly effective gross income minus insurance, taxes, and HOA fees), LTV, and your FICO credit score.

3. With the cash-out proceeds, you cannot pay off current debt, but you can invest in more real estate offering a higher rate of return than the debt (ex. 15% return on a house vs 11% rate on debt, the investment has less opportunity cost. I would use your household income of $200k to address the debt.

3a. I would use the cash-out proceeds to put down payments on up to 3 additional rentals with a private lender DSCR product.

4. Use a conventional owner-occupied home loan to purchase your personal home. I would look at an FHA-type loan with 3.5% down plus PMI or a 5% down owner-occupied option. This will give you the most leverage and you will allow you to add even more properties to your portfolio, increasing return and decreasing the risk.

@Sarah Meres any thoughts on this?

@Casey Martin I recommend checking in with your CPA as well to discuss any tax implications. Also, do you have a plan for renting the house in WI? Specifically, is it close enough for you to self manage or will you have someone in the area helping you? I think you have a solid plan with the gifted house and money. Best of luck!

1).Your mother gave you $220k and you’re going to charge her rent? Maybe count that as 20 years of prepaid rent?

2) it’s probably too late now if she already officially gave you the house, but of course this was a pretty big tax mistake. She could have sold tax free. Instead, you’ve inherited her cost basis and made it a taxable sale. So if you ever sell you will pay taxes on the difference between what she originally paid and what you sell it for instead of zero. Meanwhile you’ll only be able to depreciate off her cost basis so you’ll lose that deduction as well. 

3) she will of course lose her homestead tax exemption and you won’t get one on the property you buy for her to live in. You’ll also have to buy 2 sets of insurance for the home she lives in. Landlord insurance to cover the property and she’ll need renters insurance to cover her personal stuff. 

Next time you should talk to your CPA before you make e decision instead of after. At least with your decent income you can swallow a $50k mistake and learn for the future.   

Please consider not charging your mom anything.