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Does anyone here personally own investment property while renting for their primary residence? Or know of anyone who does?

I can think of a few reasons why this might work:

It's probably a lot easier to get a mortgage for a primary residence than a investment property. So you qualify for the mortgage claiming you own no other home and that this is going to be your primary residence. Then you continue paying rent to live in an apartment but rent out the new home you bought. Provided that you continue paying the mortgage, I doubt the bank will care. It would be illegal to claim a homestead property tax exemption if this is not your actual primary house so don't lie to the government.

Then when you have enough for a downpayment on a second investment property, you go to the bank and say "I want to buy a home, I do not currently own my primary residence" and the second home you buy should also be treated under more lenient lending practices. Then you do the same thing again and rent it out.

This strategy may work if the following applies:

1) You dont need a house to live in, and are happy renting an apartment. For example in South Florida, rent on a 1/1 in a reasonable area is $800 per month. A similarly sized condo would cost more than $800 per month in property taxes and HOA fees alone. A single family house would cost more than $800 per month in homeowners insurance alone (due to hurricanes). It makes no financial sense to buy.

2) Your AGI can be reduced to $100k or less to receive the full $25k depreciation per year.

3) Condos in your area can be purchased and rented out in a financially neutral fashion such that you recoup HOA, taxes, and mortgage payment in the rent.

Here's an example. Lets say you buy a $100k condo with $20k down. You can depreciate $3600 per year over 27.5 years. That $3600 writeoff is worth $1k less in taxes at the 28% bracket. With a 5.5% mortgage and 2.5% property taxes and $300 HOA fee, you will have an approximate cost of $1k per month. The tax write off is worth about $100 per month. Thus, if you can get an average of $900 per month rent over 30 years then you break even.

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Yes, many people here owned investment property w/o owning their primary residence. Seems half the threads we see are kids who bought a rental while living at home.

The sharp ones bought positive cashflow properties and are doing well. The idiots bought negative cashflow properties banking on appreciation, which was wiped out, and these are the people now facing short sale/foreclosure.

Ive tried to warn them over the years, but they thought they knew it all and wouldnt listen.

isnt that right Luniz????

SUCKISSTAPLES said: The sharp ones bought positive cashflow properties and are doing well. The idiots bought negative cashflow properties banking on appreciation, which was wiped out, and these are the people now facing short sale/foreclosure.

The ironic thing is that if I bought an investment property I would be banking on depreciation

tripleB said: The ironic thing is that if I bought an investment property I would be banking on depreciation

No, you're banking on depreciation against your taxes, not actual depreciation of the asset.

tripleB said: Does anyone here personally own investment property while renting for their primary residence? Or know of anyone who does?

I can think of a few reasons why this might work:


We fit this, renting in NJ and owning a rental property in ME, and here is another (relatively common) example:

- Military families move every 12-36 months on average. With the exception of the past few year, the "normal" real estate appreciation means you'd almost never be able to recoup closing costs and realtor fees by selling in such a timeline...plus the risk of having to buy and sell quickly, which can easily mean paying a bit too much up front AND having to price a bit too low to sell. Holding and renting out as an absentee landlord isn't particularly desirable (at least to me)...since future duty stations are likely to be a LONG way from the property...such as half-way around the globe. (Plus the Navy tends to be in high cost of living coastal areas, so the high home prices magnify this risk.) However, once one knows where they want to retire from the military(...at say age 40 ), it can make sense to buy an "investment" home in that area if a great deal presents itself...such as the 'once in a generation' REO/Foreclosure market right now!

tripleB said: So you qualify for the mortgage claiming you own no other home and that this is going to be your primary residence. ..... It would be illegal to claim a homestead property tax exemption if this is not your actual primary house so don't lie to the government.

It's also a federal crime to lie on the mortgage application when you affirm that you intend to occupy the property as your primary residence. Obviously it may be difficult to prove intent, and unlikely to be pursued, but illegal nonetheless.

I did as you described, purchased a cash flow positive property while renting because I wanted to wait another year to decide which neighborhood to live in.. The fine print on most mortgage apps is "do you have the intent to live in this property as your permanent residence" which creates an enormous grey area, because what you 'intend' and what you 'do' can be different. I ultimately chose to pay the extra 2% fee for an investment property so I could sleep at night, but the mortgage broker said it is common for people to intend to live somewhere and then for one reason or another decide to quickly move out of the house or immediately turn it into a rental property, its basically an honor system. (This was circa 2 years ago, things may have tightened up now, but banks have always been stricter on investment property)

Mortgages for a primary residence generally require the borrower to occupy that residence as her primary for a period of one year.

The loan application asks for the intended residency after closing. If you plan to make it your primary residence, then you put primary. The loan application does not require you to estimate your plans at some indeterminate point in the future.

When you close, you will typically agree to make it your primary residence for a year, otherwise the loan can be called or modified to a rate applicable to investment properties.

If you will honestly occupy the property as your primary residence, then you can honestly claim it as a primary on the application. Similarly, if in your mortgage, you agree to live there for a year, then that is the commitment you must honor.

No fraud occurs when you honestly answer the application's question, then honestly occupy the property pursuant to the terms of the mortgage. If you want to buy a new primary residence every 367 days, then that is your right under the terms of the agreement you signed. If the lender wanted to prevent this, they can easily ask additional questions or require additional terms.

You can call it a loophole based on intent, since people do not normally acquire investment properties by moving every year. Custom, however, does not bind a borrower - only the terms of the agreement do. That agreement makes this practice legal.

dsru said: tripleB said: So you qualify for the mortgage claiming you own no other home and that this is going to be your primary residence. ..... It would be illegal to claim a homestead property tax exemption if this is not your actual primary house so don't lie to the government.

It's also a federal crime to lie on the mortgage application when you affirm that you intend to occupy the property as your primary residence. Obviously it may be difficult to prove intent, and unlikely to be pursued, but illegal nonetheless.


And if you find a good bank, the impact is negligible anyway. On my rental, getting the "non-owner occupied rider" only meant putting down 5% more downpayment (25% vs 20%), the bank didn't penalize in any way on interest rate or points between primary home/vacation home/investment property loans. So there really is no reason to lie about intended use of the property if you take the time to shop for a good lender.

(Note: And I didn't 'overpay' on the mortgage interest vs rates at other banks...locked @ 4.625%/1-pt loan. Some of the smaller regional banks are still rental property friendly!)

tripleB said:
It's probably a lot easier to get a mortgage for a primary residence than a investment property. So you qualify for the mortgage claiming you own no other home and that this is going to be your primary residence. Then you continue paying rent to live in an apartment but rent out the new home you bought. Provided that you continue paying the mortgage, I doubt the bank will care. It would be illegal to claim a homestead property tax exemption if this is not your actual primary house so don't lie to the government.

Stop!!! This is 100% Illegal and The Banks DO CARE!!!! I highly advise you not to commit loan fraud on a Federal Application for Debt by fraudently stating you are buying a Primary Residence and then not intending to occupy the property for 1 year. This is a Federal Felony to declare a property a primary residence and not occupy it. Lenders ARE looking to see if your have taken possession and occupied the property and especially if you have gotten the homestead exemption on your taxes. Although, I work for a small bank, I know my investors, who are MAJOR banks are doing QC checks on primary residences within the 1st 90 days to catch this. Will some people get away with this? Yes, but some will be caught and be prosecuted. Please do not commit loan fraud.
tripleB said:
Then when you have enough for a downpayment on a second investment property, you go to the bank and say "I want to buy a home, I do not currently own my primary residence" and the second home you buy should also be treated under more lenient lending practices. Then you do the same thing again and rent it out.

Completely false. The fact that you have multiple properties makes you much more of a risk and there is much more stringent guidlines for multiple property owners that has come down from Fannie/Freddie in the last 6 months. 1st of all we are going to look at your past 2 years tax returns now since you are claiming that you are renting that property. All kinds of things are are going to raise red flags that you are buying investment properties if you have only owned a home in the short term and you are no longer living in it, and now want to buy a new primary. I just dont see an underwriter in most situations accepting your loan scenario. You are going to have to have a really good letter of explanation explaining why you dont live in your current property and why you are buying another one. Especially if the new property is in the same town as the last one or not any closer to your work than where you live now. It is going to have to make sense. The underwriters are looking for this exact scenario because of massive fraud in this area in the past. We are looking for people that are trying to get around investment property guidelines, required downpayments, and reserve requirements for investment properties.

Also in this lending environment "most" banks are not lending to investment property buyers without a primary residence of their own. If you can't manage and take care of a property yourself then you are perceived as a higher risk on an investment property and much more likely to foreclose.

By the way if you are converting/retaining your current primary residence and purchasing a new primary be prepared to have 6 Mo. PITI Reserves on ALL properties including the new property. This is especially important for people that are going to sell their home after closing on the new primary.

staci86 said: [..]
If you want to buy a new primary residence every 367 days, then that is your right under the terms of the agreement you signed. If the lender wanted to prevent this, they can easily ask additional questions or require additional terms.

You can call it a loophole based on intent, since people do not normally acquire investment properties by moving every year. Custom, however, does not bind a borrower - only the terms of the agreement do. That agreement makes this practice legal.



it is my experience that banks will only believe your story if the 2 properties are at least 50 miles apart.
There is also something to be said about property size/ location.

A friend of mine lives in his own home. It is a 5 bedroom house that his parents had bought for him with cash ($600k). This year, he wants to move into a different part of the county. About 10 miles from said property. Remember, he does not have any mortgage! He truly is a first-time homebuyer! However, he has the deed to the 5-bedroom house.

The property that he wants to purchase is a 3 bedroom, smaller, EQUAL or INFERIOR location to the 5 bedroom.

Guess what. The bank does not believe that he intends to occupy the 3-br.

1) it's smaller than his existing home
2) not a better location
3) both properties are of equal distance to his job. No wait, I think the new one has a worse commute.

Lenders refused to give him a loan based on owner occupancy.

I gave him the tip, to tell the lenders that his pregnant wife cannot handle the big 2-level house (stairs, too much maintenance). It appears that with this story, he was able to find ONE lender who loans him money for a primary residence.

The funny thing is, my friend was saying the truth. He really moved into the smaller house.

-Peter

ptiemann,

100% agree with that story. It has to make sense why you are moving. Why is your family situation going to be better is a good question to ask yourself. I just closed a loan last week with a client who has several rental properties and is buying a new primary. He had to explain that the he house he had was too big for 2 people with no kids and wanted a smaller home that was closer to work. My underwriter was extremely leary of that loan. I had to get them to put in writing that they were going to occupy that home as there primary residence and it was not going to be used as a investment property. Signed and notarized at closing. I know for a fact that the investor that we sold the loan to is going to hire private investigator to check on them to see if they are occupying the home. I warned them and they know the consequences if they lied to me. Also I probably will get pulled into an unhappy corporate meeting if they dont occupy the property, since I made such a fuss about them actually planning on living in the property.

If I find out they lied to me, I will go ballistic since it will be my business reputation and cause me to eat it with my underwriters in the future.

dsru said: tripleB said: So you qualify for the mortgage claiming you own no other home and that this is going to be your primary residence. ..... It would be illegal to claim a homestead property tax exemption if this is not your actual primary house so don't lie to the government.

It's also a federal crime to lie on the mortgage application when you affirm that you intend to occupy the property as your primary residence. Obviously it may be difficult to prove intent, and unlikely to be pursued, but illegal nonetheless.


It's also illegal to drive faster than the speed limit

I own multiple investment properties and rent a room from a friend im still young with no baggage so it works great for me, my rent is low, it includes all my utilities, I have my own office space and him and his GF like to cook which is worth half the rent right there

Owning your home is for the most part a complete waste of money, maintenance, the insane amount of interest you pay on your mortgage, all your utilities plus the biggest thing for me is you are married to it, you cant just move out and leave.

I do not finance anything that does not make me money (unless its 0% of course), my properties all positive cash flow and my vehicle is used to make me money everyday which is financed through penfed at 4.75%.

This is not to say I will never own a home, when I am ready to settle down I will buy my own home and probably with cash.... then ill take an equity line out and buy another investment property

And theres no way anyone is pay $800 a month in home owners unless they have a MONSTER house hurricanes or not.

Colt2001 said: I know for a fact that the investor that we sold the loan to is going to hire private investigator to check on them to see if they are occupying the home. Which lender/investor does this?

Lenders usually find out an owner occupant is not really occupying if the HO insurance cancels or demands the policy be changed to a landlords policy. I have NEVER heard of any lender or loan investor sending out private investigators on performing loans.

blok said:
And theres no way anyone is pay $800 a month in home owners unless they have a MONSTER house hurricanes or not.

agreed. i was thinking the same thing. tripleB's rent vs. buy assessment is flawed and oversimplified...really, the whole post is.

We sold that loan to Wells. What is the big trigger on the QC side is the amount of properties that he owned and that he was retaining a primary. Lenders/Investors are doing more proactive checks on primary property ownership in this new lending environment. Where before they were only looking for as you said changes in the HOI policy. We are all eating this mortgage mess and lending environment has gotten tougher by the week to lend on previously make sense but out of the box deals.

This is not the only thing that the investors are checking after closing. If you are self employed expect that the lender/investor is going to repull your tax returns within 90 days of closing, to see if you have refiled and amended your returns to adjust your income down.

The investors know that people are doing this and are looking for it.



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