Transfer of homes to Rental Corp

duplex, villa, rendering-1026381.jpg
Residential Rental Corp an Option?
Posted by: Ryan Mar 9 2004, 10:31 PM
Looking for a little direction… I currently own 2 single family homes. Each was originally purchased as my primary residence but are now rented. I am now getting stationed in Washington D.C. and want to buy rather than throw 2k a month into rent. Ive was wondering if I could start a real estate holding corporation & transfer the 2 homes to it. Once complete, I think/hope that my backside ratio of 36% of gross income would be freed up to buy a 350-400k house in D.C.???? Does any of this have any merit or am I crazy, ignorant, or just a dreamer? Would appreciate any advice.

Posted by: loanuniverse Mar 9 2004, 11:26 PM

Let me see if I understand your situation first.

Correct me if I am wrong, but I read it as follows:

You have two homes that were originally purchased as your primary residence, but that were eventually rented out. You are about to move or have already moved to D.C. You want to transfers those two properties into a real estate holding company, and want to be able to buy a home in your new town.

Ok here is the feedback {remember I am not a residential lender}:

– The rule that you mention is what is called the 28%/36% ratio and refers to your personal debt service coverage. The 28% is the most of your gross income that should be spent on housing related debt, and the 36% is the most of your gross income that should be spent in all debt.

– There should be no need to transfer the properties to a real estate holding company {the term is company since the vehicle of choice these days is an LLC}. If the houses are rented, you can make a case for the current debt not to be counted as part of your debt service calculation {leases would help, seasoned tenants would help some more}. I don’t even think that residential underwriting is that detailed. That portion of the business is very impersonal. You just have to make sure that you can document everything.

– The two mortgages will show on your credit report so you must be able to take them out with the rental income. If you have positive cash flow from the rents, you can even make a case for that to be included. {again, I do not know exactly how much credit if any the residential underwriter will give you for the extra cash flow if any. Not my area of expertise}

– You must have already encountered this situation when you purchased your second house. You will have to do the same with this one. Of course having moved to another town helps explain what you are doing.

– Transferring the property might trigger the lenders calling the loans. This is something you will have to discuss with an attorney. You probably don’t want to lose the residential mortgages that you have on the first two properties.

– Owning the properties under your name and renting them does leave you a bit exposed in the liability front, but so are millions of other people. You might want to take a look at some kind of liability insurance. I know it exists for multi-family not so sure for single-family homes.

That is it for now. As you can see, I assumed you still owed money on the two properties. If they are free and clear then the transfer will be simpler.

Hope this helps.
Posted by: Guest Mar 12 2004, 12:55 PM
Great reply! Turns out the residential loan officer i spoke with told me that they will count 75% of my rental income against my monthly mortgage. between the two homes that leaves me at -$375.00 per month (barely a car payment). she has also told me of a type of insurance that i can pay $50 a month for and if either of the houses go unrented, the ins company pays my rent until i find a tenant. sounds like its worth looking into.

The 2 houses i currently own are in GA and AZ. The GA home is on a 15 year note at 6.125. I am considering refinancing that property to a 30 yr and cashing out the $30k in equity so I can have a little more to put down on the D.C. property (buying for $400k most likely with an interest only loan without impounds). I only plan to live in D.C. for approx 4 years. Does that sound like a good idea? Please keep in mind that I am a man of very moderate means (im an army pilot). Im studying as much as I can about the real estate but really still quite a novice.

Thanks for the ideas and the advice. I am so glad i found this site!!!

Author: Commercial Loan Underwriter