Rent home temporarily with new owner occupied loan
I'm assuming this is the US. Is this illegal? Are we likely to be caught? What could happen if   caught? If you sign an occupancy affidavit at closing that says you intend to move in within 60-days, with no intention of doing so, then you'll be committing fraud, specifically mortgage/occupancy fraud, a federal crime with potential for imprisonment and hefty fines. In general, moving in late is not something that's likely to be noticed, if the lender is getting their money then they probably don't care. Renting it out prior to moving in seems much riskier, especially if you live in a city/state that requires rental licensing, or are depending on rental income to carry the mortgage. No idea how frequently people are caught/punished for this type of fraud, but it hardly seems worth finding out.
I do not think the bank would consider the 52K as equity.   Typically, a rent-to-own lease is technically a lease-option contract where you lease for a fixed amount and at some point during the lease you have the option to buy it at a discounted price.   I think the bank would consider it a negotiated price.   I know that those down payment assistance plans are considered price negotiation by the IRS for the purpose of basis cost and I suspect this would be similar where your basis is $236,800 and not $296,000. "As others have said, congratulations on saving up 75K in cash while seemingly not neglecting other areas of personal finance.  Considering that only 15% of Americans have more than 10K saved this is quite a feat.  source If you sell your old house, and buy the new one you will still be in really good financial shape.  No need to comment further. Renting your current home and buying a new home introduces a great amount of risk into your life.  The risk in this case is mitigated by cash.  As others have pointed out, you will need to save a lot more to remove an acceptable amount of risk. Here is what I see: So without paying off your existing house I would see a minimum savings account balance of about double of what you have now.  Once you purchase the new house, the amount would be reduced by the down payment, so you will only have about 50K sitting around. The rental emergency fund may be a little light depending on how friendly your state is to landlords.  Water heaters break, renters don't pay, and properties can sit vacant.  Also anytime you move into a new business there will be mistakes made that are solved by writing checks.  Do you have experience running rentals?   You might be better off to sell your existing home, and move into a more expensive home than what you are suggesting. You can continue to win at money without introducing a new factor into your life. Alternatively, if you are ""bitten by the real estate bug"" you could mitigate a lot risk by buying a property that is of similar value to your current home or even less expensive.  You can then choose which home to live in that makes the most financial sense.  For example some choose to live in the more dilapidated home so they can do repairs as time permits. To me upgrading the home you live in, and renting an expensivish home for a rental is too much to do in such a short time frame.  It is assuming far too much risk far to quickly for a person with your discipline.  You will get there." "It's legal. That's what a home equity loan is, for example. More generally, what you're talking about is a ""second mortgage"". It has no effect on the primary mortgage that you've already made to your bank; they're still secured, and if you get foreclosed, they get paid, and only if there's something left over does the second mortgage holder get anything. That's why second mortgages are more risky than first mortgages, and why you might have trouble finding someone willing to do it." You have to pay off the balance on the loan first. Also, FHA loans are not supposed to be used for rental properties. I don't know how you living there for a number of years changes things or how often is that rule enforced but you might need to refinance even if you rent it out. You would probably be best off checking through your loan documents to see if anything is listed in it in regards to tearing down the existing house. Likely it is not allowed. Thinking about it logically, the house is collateral for the mortgage, and you are wanting to destroy the collateral. I would expect the bank would not be pleased. Semi related question (answers have some good info) -  Construction loan for new house replacing existing mortgaged house? "There are 2 and 3 family houses that have an ""owner occupied"" clause for certain financing. Of course, one would rent out the extra apartments without question.  The key thing is that owner-occupied means just that, occupancy for tax purposes. Just using a small area like an office won't satisfy the requirement, so no, this isn't legal." Awesome info, this is what I was looking for. I live in FL so i will look into LLC laws. Is there a difference in obtaining loans for multi-unit properties, or any special requirements? This would be my first purchase so I'm trying to decide if I should start with a multi-unit or a large home. I read something about a first time home buyers and the FHA allowing one to put down less of an initial investment. Im assuming this is if you are actually going to be living in the home or property?   Would it make sense to have separate entities for specific types of units? For example One separate corporation per multi-unit property, but have multiple single family homes under another single entity?   Thanks for the help.  *quick add-on, would you know how long the corporation would have had to exist before being able to obtain a loan? For example, would XYZ, LLC. have to have been around for 3 years prior to the loan, or could i just incorporate the month before going to the bank? From the apartment owners perspective what was the purpose of $300? They promised they wouldn't rent it to somebody before you had a chance to see it. But lets say you did see it, and decided you didn't like the view. Would they have to give the money back? if so, why would they promise not to rent it if somebody showed up first?  I would have made it clear, as the owner, what the money was for. It was a $300 fee to delay rental. You would have essentially bought x number of days of delay. You could view it as a mini-short-term rental. Of course there should have been paperwork involved. There should have been been a receipt that at least mentioned the amount of money involved. You may need to pay the amount owed, and may need to determine if you want to sue in small claims court. Of course your agent may have some liability based on your contract with them and any paperwork they signed when the money was sent to the owner. The fact that the bank sided with you doesn't mean the courts will. Are you interested in refurbishing your rented home here in Singapore? If you are struggling with financial difficulties, you can apply for a renovation loan offered by banks. Most banks in Singapore offer renovation loans and home loans only to those who own a property. It is very hard to find a renovation loan for a rented home.  **Home loans for renovation**  You can take a home loan for your rented property and top up your home loan to finance your renovation project. If you already have a home loan, all you need to do is ask your bank representative to add extra financing to your [home loan](https://www.bankbazaar.sg/home-loan.html) for renovation purpose. Applying for a home loan for a rented property is simple. You can use an online loan calculator and compare home loans provided for a rented property. According to your repayment capacity and financial requirements, you can choose a home loan and use it for renovation. Make sure you have a good credit score while applying so that your home loan gets approved easily.  **Personal loans for renovation**  If you are not able to find too many home loans or renovation loans for rented property, you need not worry. Have you considered taking a personal loan to make awesome home improvement measures? That’s right; you can apply for a personal loan and use the funds to renovate your abode. The best thing about a personal loan is that a lender does not enquire about the purpose for your loan application. So, you can use your personal loan for any of your needs.  *Eligibility criteria for personal loans*  The general criteria to be qualified for a personal loan in Singapore are: The applicant should be 21 to 65 years old. The applicant should be a Singaporean or a permanent resident or a foreigner. The minimum income requirement for a Singaporean or PR is generally S$20,000 p.a. and S$40,000 p.a. for a foreigner.  **When are personal loans ideal for renovation?**  There are a few situations when a personal loan is the best option for renovating your rented property: Many banks give personal loans with attractive promotions such as interest-free loan for a certain period. You can take this loan and even repay the full amount before the zero-interest period expires. This will help you save efficiently on your renovation project. The minimum income required to secure a home loan is generally higher than the income requirement for a personal loan. Hence, a personal loan is a better option. A home loan generally gives a higher sum of money than a personal loan. This high amount is suitable for a construction project but will be excessive for renovation work. Therefore, it makes more sense to apply for a personal loan to give the perfect makeover to the kitchenette in your home. The approval process for a home loan is typically very lengthy. Personal loan applications get approved within 24 hours by most banks in Singapore. So now you can apply for a personal loan without any tension and remodel your balcony to have a party at home sweet home! Personal loan rates are generally lower than home loan rates. You can refurbish your living space by paying your loan at an interest rate not more than 4%. Now, you would have got a fair idea about how to finance your remodelling work. Always remember to enquire about every loan’s terms and conditions. Never sign any loan contract without being absolutely clear about the loan’s features. These are your options: Unfortunately this will not be a quick process. You should note that until a potential lender goes through a detailed review of your finances you have only been pre-qualified. This is not as good as pre-approved. With pre-qualified they are basing the determination on what you told them, not what you can prove.  Because you are aware of your short period of continuous employment you are best to be completely honest with a potential lender. That way you don't run into problems 30 days down the road when they realize the issue. The home seller will not be happy; and there was time and money wasted on down payments, credit checks, home inspections, and appraisals.  In the US in most markets while there is a significant risk that a particular house will not be available in 5 months, there is a very slight risk that a neighborhood will not be available in 5 months. "This can be done, and there have been many good suggestions on things to do and watch out for.  But to my shock I don't see anyone offering any words of caution about property managers! Whatever you do, don't assume they have your best interests at heart.  Do not assume that ""no news is good news"" and that if you aren't hearing of problems and are just collecting rent checks, everything must be fine. You can easily end up with tenants you would never have allowed yourself, or tenants with pets that you would not have allowed, etc.  Especially if the manager doesn't want you to have a vacancy and potentially lose you as a client, they may very well lower their standards just to get the place occupied.  And a year or two or three later, you may find yourself looking at a very large repair bill and wonder how on earth it could have happened when you supposedly had someone looking out for your property! There are quality, ethical property managers out there.  They are not all bad to be certain.  But whatever you do, check up on them.  And with multiple properties - especially if in multiple areas/states etc. - this can be nearly a full time job in itself.  As the saying goes, ""Trust, but verify"".  I have never found this to apply more than with rental properties and property management. Don't leave anything significant to them 100%.  You can't even assume that a rule like ""all expenses over $50 must be cleared by me first"", as that can simply mean that they don't bother to come to you for certain kinds of repairs that would cost more than that, or that they just get them ""taken care of"" by their own person (done poorly, illegally, etc.) and never tell you.  Never trust their choice of tenants blindly.  Visit the place yourself at least every few months - a quick driveby at a minimum or better if you can, arrange a reason to walk through the house personally.  Check the back yard, never assume that the front yard is indicative of anything else.  Never assume that a ""no pets"" rule will be followed, or that tenants wouldn't lie to the management about having pets.  Never assume that the tenants won't move additional people into the property as well. Always expect a bare minimum of 1 month vacancy every year, and an additional minimum of 1 month's rental revenue in unexpected maintenance/repairs every year.  This is at a minimum!  You might do much better than this, and have a high quality tenant in place for years who costs next to nothing in extra maintenance.  But do not count on it. Rental real estate investing looks so simple on paper, where it's just numbers.  But reality has a very rude habit of surprising you when you least expect it. After all, no one expects the Spanish Inquisition! Good luck!" If you help find a suitable next tenant and help smooth out the transition, most landlord generally don't have an issue to terminate the lease early, and move the contract to the new tenant. Remember that the biggest concerns for landlords is that they don't want the place to be empty (leaving an apartment empty costs them money due to tax, strata, bills, etc as well as putting in jeopardy whatever future plans they might have made under the assumption of a stable income from the rent). You could also offer to pay for the listing agent and other switching fees (e.g. putting bills under the new tenant's name, etc). If you don't have an early termination clause the rental agreement, or sometimes even when you do, these things are often negotiable. If you can guarantee that your leave won't leave them with an empty apartment with no-one paying rentals, most reasonable landlords wouldn't have issue with terminating early.  Many rental agreements also have terms regarding early terminations. This usually involves paying a fee which amounts to a month or two of rent. This may vary. "You are assuming 100% occupancy and 100% rent collection.  This is unrealistic.  You could get lucky and find that long term tenant with great credit that always pays their bills... but in reality that person usually buys a home they do not rent long term.  So you will need to be prepared for periods of no renters and periods of non payment.  The expenses here I would expect could wipe out more than you can make in ""profit"" based on your numbers. Have you checked to find out what the insurance on a rental property is?  I am guessing it will go up probably 200-500 a year possibly more depending on coverage.  You will need a different type of insurance for rental property. Have you checked with your mortgage provider to make sure that you can convert to a rental property?   Some mortgages (mine is one) restrict the use of the home from being a rental property.  You may be required to refinance your home which could cost you more, in addition if you are under water it will be hard to find a new financier willing to write that mortgage with anything like reasonable terms. You are correct you would be taking on a new expense in rental.  It is non deductible, and the IRS knows this well.   As Littleadv's answer stated you can deduct some expenses from your rental property. I am not sure that you will have a net wash or loss when you add those expenses.  If you do then you have a problem since you have a business losing money.  This does not even address the headaches that come with being a landlord. By my quick calculations if you want to break even your rental property should be about 2175/Month. This accounts for 80% occupancy and 80% rental payment.  If you get better than that you should make a bit of a profit... dont worry im sure the house will find a way to reclaim it." To start, I hope you are aware that the properties' basis gets stepped up to market value on inheritance.  The new basis is the start for the depreciation that must be applied each year after being placed in service as rental units. This is not optional. Upon selling the units, depreciation is recaptured whether it's taken each year or not. There is no rule of thumb for such matters. Some owners would simply collect the rent, keep a reserve for expenses or empty units, and pocket the difference. Others would refinance to take cash out and leverage to buy more property. The banker is not your friend, by the way. He is a salesman looking to get his cut. The market has had a good recent run, doubling from its lows. Right now, I'm not rushing to prepay my 3.5% mortgage sooner than it's due, nor am I looking to pull out $500K to throw into the market.  Your proposal may very well work if the market sees a return higher than the mortgage rate. On the flip side I'm compelled to ask - if the market drops 40% right after you buy in, will you lose sleep?  And a fellow poster (@littleadv) is whispering to me - ask a pro if the tax on a rental mortgage is still deductible when used for other purposes, e.g. a stock purchase unrelated to the properties.   Last, there are those who suggest that if you want to keep investing in real estate, leverage is fine as long as the numbers work. From the scenario you described, you plan to leverage into an already pretty high (in terms of PE10) and simply magnifying your risk. You could consider turning your current place into a Rental Property. This is more easily done with a fixed rate loan, and you said you have an ARM. The way it would work: If you can charge enough rent to cover your current mortgage plus the interest-difference on your new mortgage, then the income from your rental property can effectively lower the interest rate on your new home.   By keeping your current low rate, month-after-month, you'll pay the market rate on your new home, but you'll also receive rental income from your previous home to offset the increased cost. Granted, a lot of your value will be locked up in equity in your former home, and not be easily accessible (except through a HELOC or similar), but if you can afford it, it is a good possibility.