Borrowers Changing

With the low rates being offered by Orion, and the increase in homes for sale in some areas of the West as we sail through August, some of our clients are asking our AEs, “Can our borrower keep their current home as a rental and buy a new home?” As with most life decisions, there are both positive and potentially negative factors to consider.

An important question brokers ask their clients is, “Are you ready to be a landlord?” It isn’t for everyone. When considering the possibility of conversion, one must consider the dollars and cents of the decision that may not be covered by the rental income. Questions such as how much rent can be charged and what is the monthly payment for mortgage, taxes, and insurance. Does your client want to pay a property manager or do it themselves? They need your guidance.

You will also need to tell them to factor additional costs into the equation like maintenance, loss of rent and time. What happens when a tenant leaves the property? Will their one-month deposit cover painting, re-carpeting, major cleaning and damage repair if they were particularly harsh on the home? What about the lack of rent income between their departure and the next tenant moving in, do they have funds for that? Most importantly, can your client absorb the expenses if they have a tenant who stops paying rent that they need to evict which can take up to a year and cost them a lot of money?

One big benefit of converting a property to a rental is the tenant will be paying off they mortgage month after month. Orion’s AEs and veteran brokers will always advise talking to an accountant, but depending on the situation, there may be some tax advantages due such as depreciating the asset and expenses through the year that exceed income that can be deducted. As well, depending on the timing and how long your client has had the property, your client might be able to mitigate or eliminate capital gains with the two-in-five rule (if they live in the property two of the previous five years they can sell and not pay capital gains). Perhaps the biggest advantage of the conversion is your client has an asset that can and probably will increase in value over time. For which someone else is paying the holding costs.

A big factor for many families considering the conversion of their current home to a rental is if they have the funds to purchase their new home without selling their current home. If their intention is to access funds from their current home through a refinance or obtaining an equity line, the loan rate and amount of funds available can be impacted by the occupancy guidelines. Ask your Orion AE! A borrower will need to qualify for a mortgage to purchase their new home with the expenses of their existing home also factored into the scenario. Fortunately our underwriters are top-notch when it comes to looking at this situation.

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