How to Rent / Lease a Residence

[Jandrews]

Hello,

We are building a new house and have our current house on the market. I have about 70% equity in the current house, and a couple standing by who says they will rent if it doesn't sell prior to us moving into our new house. This is a VERY reliable couple, as we know them as friends of the family. A couple questions / comments:

1) I was planning on using the equity from the current house to buy some tax-free Muni's to arbitrage the new mortgage. If I rent, I won't be able to do that.

2) How do I set up a rental or lease arrangement. Is there a difference? Tax implications?

3) Will renting be a good deal for me? I only have 6 years left on a 10 year fixed mortgage at 4.25%. As a result, something like 75% of every dollar is going straight to equity at this point.

4) Based on the market and my mortgage payment, I figure I can collect my entire payment, plus an amount to cover the taxes and insurance, so I would have zero out of pocket (aside from repairs).

What are your thoughts on this? My view is that I will be keeping my principle, just like I would with the bonds, but I would be "keeping" 75% of each mortgage payment they would be making through the equity growth.

Does this make sense?

Thanks,

JA

[mtnfir]

I would keep it if I were you. This is especially true if the market in your area is appreciating. Not only will your payments essentially "savings" for you, you won't be making the payment. Another thing, You could sell your house in three years and not have to pay any capital gains. IRS laws state that if you sell a house that you have lived in for two of the last five years, there is no capital gains. You would pocket any cash made from the appreciation, the renters would drop your principal, and you would have the warm fuzzy feeling of knowing that you have helped somebody find a nice spot to live.
On the downside, you would be responsible for any upkeep.
You can get a lease from from any local real estate agent.
C

[fintstone]

The biggest problem of making this a long term rental is the tax implication and the fact that, based on the length of your loan, you likely have a great deal of equity in the home. Currently the profit you have made on the home is taxfree, but will not be when you sell it after renting it out for several years. Also you lose the leverage that is of such value in rental property. You could likely receive the same rent, tax writeoff (mortgage, taxes, depreciation, insurance, etc are written off), and appreciation with a much smaller investment (you could likely buy a rental with 0-30% downpayment). In your case, if you wanted rental property, you would likely be better off selling this house and buying a different property. On the other hand, if you only want to do this for a couple of years until the market is better, it might be a good idea.