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Currently in a single-family (150k left in mortgage) with current value 500k. Thinking of selling and buying condo nearby for all cash 350-400k. Then getting a new mortgage (50-75k down) for another 300k-350k unit and renting it out.
Thoughts?
Who would you recommend reaching out to locally for suggestions/advice?
Real estate tax/accountant?
Location: Sarasota/ Bradenton - University Pkwy area
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Has the current property been your main residence? If so, you could potentially qualify to exempt a portion of your capital gains profits from income tax. If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse and meet the other IRS conditions.
Per the IRS: In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
A good tax accountant can give you advice regarding your particular circumstances and the IRS rules.
You'll also want to speak with a couple of lenders regarding financing for an investment rental as down payments, interest rates and other terms will vary from a mortgage for a property for personal use.
You'll want to learn the rental rates within your targeted price range/neighborhoods so that you have a good perspective as to market rental rates and demand for rental units within your targeted price/area. As a buyer you will be looking for a monthly rental rate that will cover not only your expenses (including mortgage) but also give you a cushion for repairs and vacancies. Some experts say that cushion should be about 20%.
It helps to put together a spreadsheet for comparing properties, one in which you can factor in things such as potential annual income (minus vacancy rate), expenses such as insurance, HOA/condo fees, property taxes, maintenance/repairs, mortgage (if applicable), appreciation/depreciation, etc so that you can calculate your net operating income and return on your investment. There are sample spreadsheets (sometimes called a property investment calculator) out on the Internet that you can use as guidelines in setting up your own.
Doing a spreadsheet on each property you are considering will help you determine if that property will give you enough of a spread between income and expenses to meet your goals. Many investors in rental real estate target a return on investment of 5% - 7%, but I have come across investors that target a higher yield such as 10%.
Lastly, but very important, you'll want to confirm the condo regulations regarding rentals by getting and reading a copy of the condo docs before you make an offer on a property with rentals in mind. Do not rely on the condo owner's or agent's verbal response to rental questions. Get it in writing. You'll also want to check with the management company, if there is one, or the head of the condo association if not to see if they are discussing changes to the current rental rules for the condo community. That is important because over the past few years a number of condo communities have put in place restrictions such as you can't rent out a unit for 1 or 2 years after purchase in order to discourage investor buyers.
Lastly, but very important, you'll want to confirm the condo regulations regarding rentals by getting and reading a copy of the condo docs before you make an offer on a property with rentals in mind. Do not rely on the condo owner's or agent's verbal response to rental questions. Get it in writing. You'll also want to check with the management company, if there is one, or the head of the condo association if not to see if they are discussing changes to the current rental rules for the condo community. That is important because over the past few years a number of condo communities have put in place restrictions such as you can't rent out a unit for 1 or 2 years after purchase in order to discourage investor buyers.
The bolded is very important. Also, make sure the condo you buy can qualify for a conventional mortgage. There are quite a few condos in my Florida town where a conventional mortgage is not possible because of percentage of investor owners, active litigation, too many units owned by one entity, delinquent dues or any of several other disqualifiers which can make a complex cash-only.
Location: Sarasota/ Bradenton - University Pkwy area
4,626 posts, read 7,557,874 times
Reputation: 6058
Would add to the comment about financing of condos. Many communities do not qualify for Fannie - Freddie conventional financing for reasons the previous poster listed, plus others such as the condo community allows short-term rentals or it's brand new construction but the developer has not turned control of the condo association over to the residents yet.
There is another financing option for buyers of these types of properties -- the non-conforming condo mortgage. Because lenders consider these types of loans more risky, the interest rates will be higher. Most big box banks won't offer this type of loan, so you'll have to seek out others willing to do portfolio lending.
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