Ask Marco – How to Rent our Home and Move into Another Property

Well, Rob, thank you very much and I appreciate you sending in the question. It’s a good question. So let’s just quickly break this down because this is actually not a complicated one. So let’s put it this way. You live in a condo, it’s your principal residence, it’s not a rental property. And it sounds like in two years you want to keep the property and move into a larger home.

So you kind of outlined my bullet points for me here as far as maintaining your lower mortgage rate, unless you’re in an adjustable rate mortgage right now, that’s not gonna change. So if you were smart enough and fortunate enough to lock in a great, great low rate, you know, on a 15 year or a 30 year fixed rate mortgage, fantastic. Keep that mortgage, don’t refinance it because you’ll probably end up getting a higher rate at this point in time. But if the opportunity’s there to refinance and get a lower rate, do that before you move out because you’re gonna get the most favorable terms if it’s your principal residence. So let’s just assume that you already have very low mortgage rates and you want to keep it because that’s what it sounds like you have. Then simply keep the mortgage in place. And what you’re gonna do is ultimately when you find your new home, your larger home, you are going to put the normal down payment on that, depending on the type of financing you’re using, but let’s just call it 20%.

It could be less, but let’s just call it 20%. You’re gonna put your down payment, you’re going to get new mortgage financing and you’re gonna purchase that new home. Then you’re gonna move out of your existing condo, move into the new home, and then you’re going to turn your condo into a rental property. You’ll put it on the market, you’ll rent it out, you’ll manage it or have a property manager manage the property for you. And you’re gonna do that as if you purchased a brand new off on the market rental property. The only difference is, is you just happen to have had this property as your existing principal residence. And there are a lot of investors that do this or get started this way where they live in a property that will make a good rental property and will cash flow. And so they just choose to keep it because it’s easy to do that, keep it move into another property and then keep that property as as your first rental property or maybe your next rental property.

So maintain the low mortgage rate if you can and sounds like you probably can and will. Now, as far as setting up an LLC and setting up bank accounts, this is where some investors get ahead of themselves because they think that’s an important factor and they have to have that done before or long before they make any kind of move and nothing is further from the truth. The fact is, is you can set up an LLC as your title holding entity anytime you want, and then you can transfer title of that condo you live in into that LLC at any time all you’re doing is transferring title and you’re allowed to do this and it shouldn’t be an issue whatsoever. 99% of the time lenders have no problem with this. It’s typically allowed, just don’t miss a payment, don’t stop making payments, don’t do anything that’s gonna cause a red flag for them to do a review.

Now, once it’s your rental property, of course before you move out and turn it into rental property, just simply set up another bank account. I don’t think it makes a difference what kind of account you set up, whether it’s personal or business, as long as it’s a checking account where you can separate the rental income from your personal affairs for that property, that condo. And so generally speaking, what you may want to do is create an LLC as a title holding LLC transfer title into that LLC. And once you have that LLC set up, of course you’re gonna set up a bank account at any banking institution in the name of that LLC and that’s where you’re gonna have your income and expenses flow through because you wanna separate everything, treat your rental properties, a separate business, it’s own business, it’s an investment, run it as a business.

When you do that, you just keep everything organized and you keep everything simple and you keep everything clean and that’s exactly what you wanna do. So it’s very simple to set up an LLC. There are a lot of self-serve places online and you know, you can have an attorney do it or a professional like a CPA, but honestly it’s pretty simple to do. If it’s in the same state you’re gonna be living. When you move to another home, then it’s pretty straightforward. You could be the person as what some people refer to as the resident agent for, but if there’s anything that needs to be served to you, you could have it served to you in the same state if you live in the state where you set up the LLC. So the LLC piece is pretty simple. The bank account is pretty simple.

Keeping the mortgage rate is pretty simple as far as the tax strategies go. There really isn’t much of a tax strategy. If you’re living in the home, it’s your principal residence. If you’re not selling it, then there’s no capital gains to be had. You’re not gonna be paying taxes on it. All you’re doing is just converting it into a reclassifying it as a rental property instead of a principal residence. Now you just start treating the income and expenses as a business, as a rental property on your taxes. And whether that’s on your personal 1040 tax return or you’re doing it in another way where it’s separated, which you don’t necessarily need to do. This is not tax advice or legal advice, you know, check with your tax professional, but you could definitely have that as a flow through entity that flows up to you and your 10 40 tax return and you just treat it on, I believe it’s on your schedule C or EI always get those two confused, but it’ll just show up on your personal tax return and you’ll just treat it as such.

You treat it as a business, but it’ll show up in your personal tax return ’cause it flows up into your tax return. And the process is no more complicated than what I just described. When you find your new home, move into it. And in the process of doing that, just put your existing condo on the market when you’re ready to do it, and you have the timing down where you can move out, get your property cleaned up, fixed up so it’s rent ready and has move in condition and you’ll just move your new tenants in and you’ll just start cash flowing that property and doing what you would normally do if it was an out of state property. So I think that’s the long and the short of it. Honestly, there’s nothing complicated about this. And like I said at the very beginning, this is a very simple process.

Find yourself the best mortgage terms you can and just run the numbers. The one thing that kind of went off in my mind when you mentioned condo, I don’t know what state you live in, but in some states, in some areas condos can be very expensive in terms of the expenses. And what I’m thinking of specifically are the homeowners association fees, like the HOA fees or condo fees that are involved in some places, like in California here, the HOA fees can be well into the hundreds of dollars or more, and that would eat up a lot of your cashflow and it wouldn’t make sense to keep it as a rental property if that’s the case. So again, run the numbers, just make be very thorough and inclusive and then, you know, of course factor in the possibilities of vacancy and also factor in maintenance and repairs that will occur from time to time year over year, maybe not all the time, but budget something in.

And as a minimum, if you want to be somewhat conservative factor, a 5% allowance for vacancy rate and 5% maintenance and repairs. And if you do that, you’ll be okay, especially over the short, medium term long term, you’re not gonna have, you shouldn’t have any major capital expenditures with a condo because you have a condo association and there’s shared walls, shared roof. The condo association usually takes care of all that stuff, unlike a single family home. But if you do have your own hot water tank, your own HVAC system, things like that, things that will break down or wear out after 10, 15 or even 20 years, you’ll want a budget for that. And sometimes it’ll last longer, 25, 30 years just depending on the quality and condition of the equipment. But just know that, you know, every 15, 20, 25 years, you’re gonna have probably some sort of major expenditure.

But that’s it. I mean, there’s really nothing complicated about this. It’s no different than purchasing a another property or your first property. You’re just keeping the other property. And all you’re gonna do is just shift your mental gears, put on your investor’s hat, and just treat it as if it’s your investment property regardless of where it is or whether you acquired it as your principal residence first or not. Well Rob, thanks for the question. I appreciate that. I’m gonna try and keep this episode to 10 minutes and start doing shorter episodes with individual Ask Marco questions so I can just knock them out in eight, ten or twelve minute episodes, one episode per question, and that way I can probably squeeze in some more episodes during the week. That is it for today. If you have a question about real estate investing, investing in general finance, personal question about me and what I’m working on or anything like that, just submit that on the website passiverealestateinvesting.com.

And you know, I’m gonna start plugging every once in a while. Our private equity firm, which is an investment fund, Norada Capital. Just go to noradacapital.com and check it out. If you are interested in earning a passive predictable income of 12% per year or 15% per year, if you qualify, it might be an opportunity for you. It is a truly very passive investment. It is not real estate based, so don’t think it’s about real estate, but it is another alternative form of investing that will allow you monthly passive predictable income if that’s something you are looking for at this point in time. And that is it for today. I appreciate you listening. Thank you and we’ll see you all on our next episode.

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