Great question posted on LinkedIN Answers today.
The scenario is that a military serviceman has been purchasing homes as a primary residence, with primary residence mortgage terms. In 2-3 years, the military relocates him and instead of selling that house, he keeps it as investment property. But now he is at a point of needing some real estate investment strategy and asking a very good question.
Perhaps you or someone you know is in the same situation or plans to start investing in rental real estate.
As can be seen from the responses so far, the answer varies depending on the perspective of the person answering. There is a tax perspective, a liability protection perspective, and a financing strategy perspective and perhaps others.
As mentioned by Greg Nagel in his response, by purchasing the homes as he has done in the past as owner-occupied transactions there is the benefit of getting the lowest cost mortgage financing. But the caution provided by Brian Sajdak is not to be taken lightly. When purchasing a home with a conventional mortgage you are going to sign either a mortgage document or a deed of trust depending on the state. That document is going to describe conditions under which the lender is giving you a loan. If you violate these conditions, you default on the loan even if you are paying on time.
The actual "trigger" term involved is called the "Alienation Clause" which typically states if a transfer in ownership of the property to another entity is considered as having "sold" the property and that brings about the "due-on-sale" or “acceleration clause”. The lender is within their right to demand you repay the loan upon learning of a title transfer. For clarification, an "Acceleration Clause" means the payoff of the loan can be accelerated to happen NOW and that can happen for several different reasons, not just alienation.
Some people may advise you to still transfer the property claiming that if the loan payments are made on time, the lender will "never know" about the title transfer. That advice contains a definite risk because if the transfer IS "caught" the loan will need to be refinanced or otherwise paid in full in a very short time period.
All I'm experienced to give advice on is the financial perspective, and I believe the way it is being done now provides the best overall mortgage loan terms. One last thing to keep in mind is that once a borrower has 10 conventional mortgages, that person is capped out. Conventional loans that meet Fannie Mae or Freddie Mac guidelines limit the total financed properties for a borrower at 10. Once an investor reaches that size of a real estate portfolio it is required that they come up with a commercial financing strategy.
©2007 Ken Stampe
Ken Stampe is a Mortgage Loan Originator, Mortgage Author and Mortgage Loan Officer Instructor living in Dallas, TX. Ken provided his first client a mortgage loan in 1996 and writes about home buying and mortgages to help clients make smart home mortgage loan decisions. Contact by email at Ken@KenStampe.com
What resource do SMART home buyers use?… Mortgage Calculator Bank.com
What a GREAT! site.
I just want to thank Ken Stampe again for the amazing job he did closing my Home loan. It's nice to be able have confidence in knowing when and if your home is going to close. He is great to work with and kept me informed thru out the whole process.
Posted by: Brian Brooks | March 25, 2008 at 08:53 AM