Q: We are avid readers of your newspaper column. Here’s our question: We own a house and are renting it, but we bought it as owner-occupied. How can we change it to rental or investment property? We are trying to be landlords and want it to do it legally. Thanks for your time.
A: While I’m glad you want to own your property “legally,” I want to make sure you understand the situation before jumping to refinance on the property.
If you don’t need to refinance your current loan and are satisfied with the loan terms you have, you may not need to do anything. Most residential loans state that you must have purchased the property for your own use and you must then use the home as your primary residence for at least one year.
However, residential loan documents do not tie you to that property as your primary residence forever. If more than one year has gone by and you used the home as your primary residence for at least one year and your intent when you bought the home was to buy it and use it as your primary residence, you should be fine and may not need to do anything.
However, if you have now rented the home and want to refinance the loan, you would have to refinance the property as an investment property and obtain an investment loan for that property. In some circumstances, the home might be treated as residential real estate but it will still be an investment loan for you. Those types of loans are harder to come by, but you can talk to various lenders and see if you can get the right amount of financing.
An investment property lender will require you to have 30 to 40 percent in equity on an investment property. Do you have that? Can you do a “cash in” refinance in order to get to that level if you’re not already there?
Finally, refinancing to an investor loan will be costly. Typically, these loans have higher fees and carry a higher rate of interest than owner-occupied loans.
I’m not trying to encourage you not to refinance. I just want you to understand how difficult it might be to do it right now.
You do seem concerned that your property is not legally financed. Just remember, if you bought your property as “owner-occupied” and actually lived in it for at least a year, and now are renting it, you probably don’t run afoul of the language in your loan.
Most loan documents don’t require you to refinance if, later on, your plans change.
For information regarding how to classify your property as a rental for IRS purposes and deductions you’ll be able to take against income the property generates, please consult your tax advisor or read some of the information the IRS has on its site at www.IRS.gov.