question on renting my current home - Posted by Eric

Posted by DanT on June 22, 2001 at 13:49:05:

Eric,
Shoot I would! But then again I am already a landlord, LOL. If you can accomplish your goals for your new home and rent this too I would certainly give it a try. You could rent it for a couple of years and if you don’t like landlording sell it then. You still won’t loose your tax status. If you like it then continue to rent it out or refinance it and pull some cash out at that time. Lots of options. My sister went through this same dilema a few years ago and I gave her the same advice, house has gained 15k in value and she is ok with the landlord thing. She doesn’t want to do more but is ok with the one. Use the search at this site for more on tenant screening and basic property management or email me if you wish. DanT

question on renting my current home - Posted by Eric

Posted by Eric on June 22, 2001 at 13:20:41:

Hi, we are looking at building a new home. By the way, I’m not in real estate at all. Our current home is worth $145,000. We owe $76,000 on it. Our note is $660 a month including taxes and insurance. Our interest rate is 6.38% with 17 years left on the note.

The new home is $215,000 and the note would be $1250 (P&I) if we take the equity from our current home. If we put all that equity toward the new home, our note will be about $1500 per month.

Now, I hate to give up the current home with such a low rate on; so, I looked into renting it. Homes like this in this area rent or around $1400 high to $1100 per month. At $1100, it would return approx $450 above the note which could go toward our new home. This $450 is much more than the $250 per month that our new home note will increase by no using the equity from our current home.

So, should I rent this home and have someone else pay for it, or is there something else to watch for? We have enough cash on hand to get us through if the house does not rent right away. Thank you for any input - I am totally new to all this. Eric

A Tax Lease answer - Posted by Bill Gatten

Posted by Bill Gatten on June 23, 2001 at 16:37:34:

Rent it out. Definitely! When the loan is finally retired, you’ll be very glad you didn’t sell it.

However, let me give you an idea you perhaps haven?t though about for getting a lot more rent and ending your landlord responsibilities at the same time. How about leasing it out for 2 or 3 years (or more) on a “PACTrust Tax Lease” basis? In other words: why not charge your tenant more rent in exchange for their being able to take the tax deduction for your mortgage interest on your loan and the property tax.

You need merely figure out what relinquishing the deduction will cost you (if anything), and then charge your tenant commensurately more than that per month. The tenant?s after-tax rental expenses will invariably decrease in proportion his income-tax bracket: while your rental income goes up. Each month he will pay ?less? rent out (after tax) while you take ?more? rent in.

However, here?s the best part…

Note that under IRC 163(h)4(D), in order for the resident beneficiary in a land trust to be able to take the active tax write-off in the first place, they have to be able to demonstrate having the full “risks and burdens of ownership (responsibility for maintenance, repairs, etc.),” along with their beneficiary interest in the entity in which is vested the ?equitable? title to the property.

All of this becomes possible via the PACTrust (3rd party trustee co-beneficiary land trust conveyance). You merely make the tenant a co-beneficiary with a contractual agreement that at the end of a specific period of time (2 or 3 years) the trust and the lease will terminate. Upon termination they will sell you their beneficiary interest for $x,xxx (it can be specified in a silent rider in advance)?and just move on.

You can then raise the monthly payment amount and start all over again with someone else if you wish.

Many think of the PT only as a temporary subject-to holding device, at the end of which the property has to be disposed of: but it doesn’t have to be that way at all. The PACTrust is merely another (far safer and more lucrative) way to do (achieve the objectives of) Wraps, Leases, Lease Options, Lease Purchases, Contracts for Deed, Equity shares, Silent Carries, etc. It?s not another alternative: it?s another way to do all the alternatives.

For now, though, just remember: “Tax Lease???good thing”

Try to structure a similar ?tax lease? arrangement) any other way and you end up with some or all of the following down-sides:

Due on Sale violation

An actual inadvertent disposition (sale) of the property

Multiple parties being subject to having their home or income property embroiled in each other?s creditor liens, suits, judgments and personal problems

BK?s, marital dispute actions, Probate, tax liens, etc.

Virtual impossibly of eviction when/if the resident owner would default and refuse to cooperate

Risk of the seller silently, further encumbering the property

Payment of capital gains tax re. a ?sale? of the property, when that was not the intent

Risk of re-characterization as something else

Risk of parties not acting in the best interest of the other, or later changing their minds later

Bill Gatten

Re: question on renting my current home - Posted by phil fernandez

Posted by phil fernandez on June 22, 2001 at 16:41:13:

If it were me I’d rent out the first house. You will have someone paying down the old mortgage and have a $450 monthly cashflow. However figure about $150/mo going to repairs to the house so your net cashflow should sugar off to about $300 positive a month. And while you are renting the first house out hopefully over time it is appreciating in value. And when converting your residence over to rental property you can start depreciating the house. That willgive you added tax benefits to offset other income.

Instead of one house appreciating in value, if you hold on to your first house also, you will have two houses appreciating. In fact after you rent out the first house, I’d be looking for a third house. That’s the beauty of rental real estate. Let your tenants buy the properties for you.

And I’d hate to lose a low interest mortgage on your first house by selling it.