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Thinking of buying a 2nd home for rental income

John622 20 10 December 29, 2015 at 09:17 AM in Home & Home Improvement (2)
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Me and my wife currently make about 200k a year. We currently own a home with a mortgage of about 400k left on the balance. Currently we are saving about 4-5k a month, and have 80k in our savings account. I'm thinking about buying a 2 family home and to rent out the entire home. Couple of questions, the mortgage on the 2nd home would the interest be tax deductible? If its a 2 family home, who pays the heating and water bill (usually houses in NYC have one meter)? Is it harder to get approved for a mortgage for a rental/investment home?

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not sure if serious or troll.
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#3
Quote from John622 View Post :
Me and my wife currently make about 200k a year. We currently own a home with a mortgage of about 400k left on the balance. Currently we are saving about 4-5k a month, and have 80k in our savings account. I'm thinking about buying a 2 family home and to rent out the entire home. Couple of questions, the mortgage on the 2nd home would the interest be tax deductible? If its a 2 family home, who pays the heating and water bill (usually houses in NYC have one meter)? Is it harder to get approved for a mortgage for a rental/investment home?
1) interest on 2nd home would be deductible against the income you earn. You would need to do a Schedule E for the home you rent out. It's not like you just don't have to report the income you get and get an extra interest deduction (or at least that isn't the legit way!).
2) Who pays for the heating and water bills? That is up to the landlord I assume and is negotiable barring some state rule which I would doubt exists but who knows. I used to include water and electricity up to $150 total a month. If it went over they got a bill from me but in your situation where you can't prove who actually used what it's difficult to say how could you accurately charge them.
3) Yes it is more difficult to get a mortgage for a rental/investment. You only get to factor in 80% of the expected rental income when calculating your ratios. Rates/fees are also higher than a owner occupied mortgage but not insanely so.

My advice would be to read up on rental properties and how to account for them as a lot of people don't realize how it works. It's not rocket science but given the salary you quoted just know that it's unlikely that should you have a loss on your rental property (income - expenses) it's unlikely that you will be able to use it to offset your ordinary income. The gov't doesn't like "rich" people to be able to write off losses on rental property but is fine with "poor" people doing it.
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#4
Quote from LivninSC View Post :
1) interest on 2nd home would be deductible against the income you earn. You would need to do a Schedule E for the home you rent out. It's not like you just don't have to report the income you get and get an extra interest deduction (or at least that isn't the legit way!).
2) Who pays for the heating and water bills? That is up to the landlord I assume and is negotiable barring some state rule which I would doubt exists but who knows. I used to include water and electricity up to $150 total a month. If it went over they got a bill from me but in your situation where you can't prove who actually used what it's difficult to say how could you accurately charge them.
3) Yes it is more difficult to get a mortgage for a rental/investment. You only get to factor in 80% of the expected rental income when calculating your ratios. Rates/fees are also higher than a owner occupied mortgage but not insanely so.

My advice would be to read up on rental properties and how to account for them as a lot of people don't realize how it works. It's not rocket science but given the salary you quoted just know that it's unlikely that should you have a loss on your rental property (income - expenses) it's unlikely that you will be able to use it to offset your ordinary income. The gov't doesn't like "rich" people to be able to write off losses on rental property but is fine with "poor" people doing it.
Great answer!
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#5
Quote from LivninSC View Post :
1) interest on 2nd home would be deductible against the income you earn. You would need to do a Schedule E for the home you rent out. It's not like you just don't have to report the income you get and get an extra interest deduction (or at least that isn't the legit way!).
2) Who pays for the heating and water bills? That is up to the landlord I assume and is negotiable barring some state rule which I would doubt exists but who knows. I used to include water and electricity up to $150 total a month. If it went over they got a bill from me but in your situation where you can't prove who actually used what it's difficult to say how could you accurately charge them.
3) Yes it is more difficult to get a mortgage for a rental/investment. You only get to factor in 80% of the expected rental income when calculating your ratios. Rates/fees are also higher than a owner occupied mortgage but not insanely so.

My advice would be to read up on rental properties and how to account for them as a lot of people don't realize how it works. It's not rocket science but given the salary you quoted just know that it's unlikely that should you have a loss on your rental property (income - expenses) it's unlikely that you will be able to use it to offset your ordinary income. The gov't doesn't like "rich" people to be able to write off losses on rental property but is fine with "poor" people doing it.
First off, when one evaluates a rental property as a candidate, one needs to do a complete analysis of all costs, expenses and income. This includes Utils, taxes, insurance, cost to borrow, maintenance, mgt fees (if any), etc. and what the rental income is\should be. There are spreadsheets that can be found online that can be used to help you do an quick analysis in a plug and chug manner. One should not be buying property with a capitalization rate of less than maybe 7-8% depending on the market (worst case). One is not in the rental business to speculate and any potential gain from asset appreciation over time should not be considered at the primary level though you obviously want to avoid areas you feel have a higher risk of depreciating over time. In some highly sought after areas you will see cap rates < 5%. I would usually advise not going anywhere near these as they are more speculative on the market than for actual income (my 2 cents).

Secondly, any rental property should be done under a corporate flag imo and as such all corporate expenses including the costs to borrow are deductible. In an LLC (or S-corp), the gains (or losses) are passed through to the owner(s) each year. As such, if there is a loss, it is eligible to be offset by another like gain from another rental property (or corp). If there are no such gains, then you can take a 3k a year loss and carry the remaining loss forward until it is used up or offset by a future gain. How much you make in other income outside of the corp has nothing to do with any of this. You will be taxed at your personal income rate on income irrespective of where that income comes from.

As to the Ops situation, with that much of a mortgage left, I would think it is going to be difficult to find financing for a second purchase. A lender will look at your total assets and a large debt is going to negatively affect their decision I would think but it depends on the situation of the property and other assets\income as well. Regardless, you will most likely need to put down 25+% and show a sound business plan and financial report that has a nice return on income. As to who pays for utils, if the entire house is being rented, then you have the tenants take ownership of the utils and switch them to their name as the easiest solution. In a 2 family, it means two meters for everything (added cost and not on always practical if the house is not designed for it). If not, then you have to roll an estimated utils bill into the cost of the rent and pass that onto the tenants (i.e., estimate the total monthly utils and make sure you up the rent you ask for by that much). You will also need to lock the thermostats so the tenants can not go around pushing them up to 80 degrees in the winter and 60 in the summer.
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Last edited by YanksIn2009 December 29, 2015 at 03:21 PM
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What kind of shrinkage rates are reasonable? By "shrinkage" I mean deabeat tenants, time on the market without rent - basically, you can't assume you will be renting the place out 100% of the time.

FWIW when we moved from a condo to a house I had wanted to keep the condo to rent (the mortgage was nearly paid off) but the mortgage company (new house) wanted a signed lease agreement to count the (potential) rental money as income. In the end I decided it wasn't worth all the bullshit.
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#7
Quote from Dr. J View Post :
What kind of shrinkage rates are reasonable? By "shrinkage" I mean deabeat tenants, time on the market without rent - basically, you can't assume you will be renting the place out 100% of the time.

FWIW when we moved from a condo to a house I had wanted to keep the condo to rent (the mortgage was nearly paid off) but the mortgage company (new house) wanted a signed lease agreement to count the (potential) rental money as income. In the end I decided it wasn't worth all the bullshit.
Depends on the area the market and how long the current tenant(s) have been there generally. If you have multiple tenants, then you can approximate based on the number of units, rental history and lease expiration dates. If it is just a single family house, then it can take 1-2 months to find a tenant so you have to factor that into your equation, esp if the place is currently not occupied and\or needs repairs. As to deadbeat tenants, also tends to vary based on the area, but in this case one really needs to do a credit and background check on any serious applicant and make sure there are no issues. Nothing is guaranteed, but a person with a good credit rating, financial history and a long\stable job history with references is less likely to be a deadbeat or trouble maker for ex. And of course you always get a decent security up front.

As to what the mortgage company did wrt your condo, that is pretty standard. They only count as income something that is in place already. You would need to get a tenant and a lease anyway so it really should not have been that much of a hassle in the grand picture of managing a rental property. Whether that was more than you wanted to do or fit in your time frame for the purchase of your home is another matter of course.
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Last edited by YanksIn2009 December 30, 2015 at 09:17 AM
#8
Very good answers here. Are you living close by? Are you going to paint, fix HVAC, plumbing issues or shovel snow?

My parents and I have been landlords for a long time (of a 3 unit home in NYC) and we have had our fair share of sh-tty tenants (you have to screen well)... which lead to many days in housing court (to evict the SOBs).

I would not recommend the landlord life to anyone.
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Quote from p3dr0 View Post :
My parents and I have been landlords for a long time (of a 3 unit home in NYC) and we have had our fair share of sh-tty tenants (you have to screen well)... which lead to many days in housing court (to evict the SOBs).

I would not recommend the landlord life to anyone.
Hmm depends on the area to be honest. If it's in an affluent area or an area with high demand, it shouldn't be too hard to find good tenants. Although the cap-rate is generally low due to the perceived safety and the high tenant quality.

On the other hand if you have Class B or Class C properties in crappy areas then yes...it can be a challenge. Although you would be compensated for this inconvenience/risk by the fact that the property prices are lower relative to the rent.
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#12
yes tax will be deduct because you are making money by this property
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#13
First off, I am not sure that I completely agree with your forethought of investing in a rental property when you have 400k of mortgage left on your primary house. That is a whole lot of interest you could save by just paying more every month when you can afford to. You both have good jobs but can't count on it for tomorrow. The easiest thing for you to do without the headache of rental property and risking another mortgage is to just pay off the property you already own and build equity in the house. While you're at it, don't think about people advising against paying off your mortgage. Trust me, I had a 15 year mortgage and still paid it off but had a good chunk of money when I sold. Debt including mortgage is a burden.
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#14
Quote from hbasavar View Post :
First off, I am not sure that I completely agree with your forethought of investing in a rental property when you have 400k of mortgage left on your primary house. That is a whole lot of interest you could save by just paying more every month when you can afford to. You both have good jobs but can't count on it for tomorrow. The easiest thing for you to do without the headache of rental property and risking another mortgage is to just pay off the property you already own and build equity in the house. While you're at it, don't think about people advising against paying off your mortgage. Trust me, I had a 15 year mortgage and still paid it off but had a good chunk of money when I sold. Debt including mortgage is a burden.
i think there is no risk because everything is insured by insurance company then why take tension
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