Renting My Current Primary Residence

[atchudy]

I am considering renting my current primary residence which is owned by a friend and I, in Baltimore. The current rental market has so much demand, I can rent it for almost 2x the mortgage, taxes, and insurance; paying it off in 8-9 years.

The house has a conventional 30 year mortgage at 4.00%.

Is it advantageous to create an LLC to put the house under to mitigate liability?

If I wanted to purchase a new primary residence, how long of a rental history would I need to qualify for another mortgage? Would I only be able to claim 50% of the rental income?

[AZGolf]

What were the terms of your current mortgage? I know when I applied for one, I had to sign a contract indicating it would be my primary residence. If you got your mortgage based on signing a document that it will be your primary residence then you are in breach of contract if you start using it as an income property. As for creating an LLC, I would. I have read that some people create an LLC for every single property they manage, so if they have 10 homes, if they get sued over one house, they can't then come after the other 9 homes on the basis of what happens to the one. It would make for more management, but it sounded very crafty to me: limiting risk as much as possible.

[atchudy]

I am only required to maintain it as a primary residence for 1 year, which has well passed.

[bubbagti]

What were the terms of your current mortgage? I know when I applied for one, I had to sign a contract indicating it would be my primary residence. If you got your mortgage based on signing a document that it will be your primary residence then you are in breach of contract if you start using it as an income property. As for creating an LLC, I would.

If your going to a "stickler" for a primary resident clause you shouldn't advocate transferring the property to another entity. That is a breach of contract too.
Every mortgage contract I have ever seen contains a Due on Sale clause that enables the lender to call due the loan with the transfer of the deed for any reason. Filing a Quit Claim deed(this is usually the most used type for transfer to an LLC for investment property) certainly breaches the contract.


OP, transferring to an LLC used to be common practice but I know a lot of property owners have opted for adequate insurance coverage instead. Holding the property in an LLC entity makes it very difficult to doing any sort of refinancing down the road.

Most lenders will include rental income as personal income if you can provide a lease. They may only accept 70% of rental income as personal income for DTI purposes so keep that in mind. Every lender has their own loan qualification standards but the above is pretty standard

[Johnny25]

Could he not refi as an income/investment property and enter a new contract? The interest rate may be higher depending on the current rate, as they are with these types of loans, but if he's earning 2x that of his current loan payments every month, he is still walking away better off.

Correct me if I'm wrong. Also, I've thought of this casually with my condo. I never thought about setting it up as an LLC. Good idea.

[GeoffD]

OP, transferring to an LLC used to be common practice but I know a lot of property owners have opted for adequate insurance coverage instead. Holding the property in an LLC entity makes it very difficult to doing any sort of refinancing down the road.

This.

[atchudy]

The insurance part makes sense. Thanks.

How about the rental income situation. Claiming 50% of the income to offset what the bank sees as 100% of the mortgage, really doesn't help very much.

[bubbagti]

How about the rental income situation. Claiming 50% of the income to offset what the bank sees as 100% of the mortgage, really doesn't help very much.

Depends on the Lender.
As a general rule, if you have a signed lease, lenders will accept rental income as part of your personal income to increase your DTI. They may only accept 70% of rental income, they may accept all of the rent if you have a 2 year history of occupancy