I would run the tax scenarios and figure out which will be more favorable as a second home or as a rental property. How your kids roommate handles payments could be structured in many different ways in either scenario.
@momofthreeboys I meant for purposes of purchasing I can just say Im buying a home and get conventional financing. I can then make it a rental.
@partyof5, might there be issues with the mortgage if the lender finds out the “home” is actually an investment property, to which different lending rules might apply?
@rosered55 I suppose, but people have properties all the time that turn into rentals because they can’t sell them so I’m not really worried. If I approach it as a primary or secondary home the terms will be better. I eventually would like to live in the area so financing as a second Home wouldn’t be bad. Since I technically don’t have a primary home I’m not sure how the bank would classify.
If "the “home is actually an investment property…” meaning not “owner occupied.” In some areas, that also affects property taxes.
This is a case where you’d probably benefit from speaking with RE attorney in the college area. (Including whether your child living there qualifies as “owner occupied.”) And your CPA–and an insurance agent, re what’s covered in different scenarios, costs and liabilities. There’ll likely be various tradeoffs.
Plus, many here will have their own take. Eg, if it were me, I might just buy it, if it’s affordable, in good shape, less than dorm costs, and will appreciate/be sellable there, later. I wouldn’t worry about how much “rent” any more than if a friend moved into my own home and shared costs.
But I’m not lawyer, lol, and would be consulting one, if I didn’t know.
Easy enough to find out. In Michigan I can only designate one place as homestead for property tax purposes.
If she’s already a sophomore, she will only have 2 more years of school before she graduates. What then?
I think your lender will notice if it will not be owner occupied. When you qualify, they’ll wonder how it is going to be owner occupied if your jobs and thus income are not in the same area. Getting insurance on the property will require a statement that it will be owner occupied.
But you can try it.
@twoinanddone I don’t plan to lie and tell the lender I will live there. I only mentioned I don’t know If it’s technically classified as a second home since I don’t currently own a first home. Also, my job is not located where I live now because I work remotely so that could never be a prerequisite. It could be classified as a vacation home I suppose as I will stay there while I am in town.
@HImom I mentioned earlier up thread I plan to keep the property. It’s really close to school and ultimately I would like to move there assuming my husband can find a job. I certainly don’t plan on living here during retirement. I need my dollars to stretch.
Well, if you plan to move and live there, then it makes more sense. Good luck with your plans. I hope things work out as you plan and expect.
From the IRS Schedule E instructions:
Maybe this would apply, since you are only renting out “part” of the apartment to the roommate. Regarding your other scenarios, it seems like it might depend on whether you have a gain or a loss.
When S1 was in grad school, I purchased a small house for him to live in. Officially, he rented it from me, although I gifted him the rent, so no money changed hands. He took care of all the utilities. When he graduated four years later, I sold it, at a decent profit. I never tried to deduct anything. The purpose of owning it was simply so he would have a place to live without having to take out student loans to pay rent.
When his GF (now wife) moved in with him, she insisted on paying me rent. Since I figured she would become my DIL eventually, I only charged her $100 a month. I suppose if the IRS really wanted to make my life miserable, they could require me to pay taxes on that money – but then I’d deduct the RE taxes and the insurance I paid, so I’d probably come out ahead.
Maybe I was naive, but I didn’t think too much about it.
If you tell the bank this is your home, they will ask you to purchase homeowner’s policy vs rental policy (cheaper)and to send them proof of insurance every year.
It is usually a question on the application whether this will be owner occupied. The bank or mortgage broker uses this information to know what type of mortgage you are eligible for -FHA, VA, etc., because then they’ll know how they can resell the mortgage. Very few mortgages are kept by the originator.
It certainly wouldn’t be a lie to say “my family will be using the house”, At least for 2 years.
I didn’t think OP would lie, just pointing out that the mortgage company has considerations for their business. There may also be restrictions on the property being purchased as to what type of mortgage there can be. FHA will only allow a certain percentage of a property to be FHA mtgs. Some properties restrict rentals, or short term rentals, or number of occupants.
“My family will be using the house” isn’t an option on a loan application. It’s more like “do you intend to occupy the home as your primary residence?”
I literally just thought of doing this Saturday. This morning I am on a flight to look at the property, thank goodness a last minute economy ticket was pretty cheap. I’ve been approved for a loan but they are making me classify it as a rental property which solves my LLC issue. I’m not sure I will keep this lender but it was the only option available on a Sunday and I needed a letter to make an offer.
Today I will drive by the property to see if I want to make an offer. This is a multiple offer situation and the cutoff is noon. The agent can’t get to the property before I have to make the offer so this is way outside of my comfort zone but I’m going for it!
So you might make an offer without seeing the inside of the place? Ouch.
Definite ouch. At least, can you make the offer contingent on a pro inspection?