Real Estate Matters | Is it a good idea to turn FHA-financed condo into a rental?

November 20, 2013
(Michael Williamson/THE WASHINGTON POST)
(Michael Williamson/THE WASHINGTON POST)

My daughter and I bought a condominium for about $85,000 last year, and its value has gone up at least 10 to 15 percent since then. She is the primary owner for tax purposes since her Social Security number was used for the loan.

With her name and mine on the loan application and property, we qualified for a 3 percent down FHA loan. Recently, she lost her job and is moving back home with us. She no longer wants or need to own the property.

I am willing to take over the mortgage and rent the property out since I had paid for the down payment and closing costs when we bought the property. She has been paying the mortgage and utility to me every month while she stays there. The mortgage was less than renting an apartment.

I understand that her ownership can be transferred to me by doing a quitclaim deed, but transferring/refinancing or assuming the loan would cost me additional money; that is what I wanted to avoid the first place.

What are my options? I do want to own the property so my daughter does not need to be concerned with the property showing up on her credit report as unnecessary liability.

From the information you have sent us, it appears that both you and your daughter are on the title to the condominium and both of you are responsible for the mortgage. Until you either refinance or assume the loan, you and your daughter will be equally liable for the debt and that debt will show up on both of your credit reports.

Given that you believe that the property has gone up in value quite a bit, you could try to refinance the property. But as you’ve indicated that your primary intent is to rent out the condominium, you might find that the interest rate you get may be quite a bit higher than what you have now.

It seems that you want to take advantage of the great interest rate and loan amount you received with the Federal Housing Administration (FHA) loan you received. That rate was predicated on you or your daughter living at the condominium as a primary residence. Even if you could assume the debt and have your daughter released from the obligation, at the time of the assumption the FHA might want to know that your ownership of the condominium is going to be for your own use and not as an investment property.

Depending on where you live, you might also have a mortgage tax — a tax on the value of the mortgage taken for a property. That tax can be substantial, and simply getting a new mortgage can be rather expensive.

As for transferring title from her name to your name, you might be able to do that, but you should know that in some places the transfer of title might trigger a real estate tax review of your property. If your property’s value has gone up 15 percent, you might see your real estate taxes go up by that proportion as well. Also, the transfer of title won’t release your daughter from the debt.

You could sell the condominium, but you will pay federal income taxes on any profit you have made over the last year, along with any state income taxes.

We recommend that you sit down and work through the numbers. Determine what rent you could get from the condominium. Then figure out what your current monthly expenses are, along with a cushion for other expenses that might come up for the condominium. Since your current homeowner’s insurance rate is for a personal residence, you might also want to find out what the insurance rate will be if it’s a rental. Also, in some states, real estate taxes are higher for income producing properties than they are for personal residences.

On another front, some condominium associations limit or prohibit rentals. You should determine if there are any rental restrictions in your development or even talk of these restrictions. You should also find out if there are any rental time requirements or fees to be paid. Your whole idea of renting the unit might go out the window if you find out that you can’t rent the unit or that the fees the association levies along with other expenses won’t make it worth your while.

If you overcome some of those issues, you still need to figure out what owning the condominium does for your finances and your federal income tax situation. You might find that owning the condominium affords certain tax benefits that you are unable to receive. Some real estate benefits are limited to people who are not real estate professionals. You might find that any losses or depreciation that you receive might not benefit you due to federal income tax regulations.

So, determining whether the investment will work for you is more than just the question of taking title to the property. Please do some digging into some of the issues we mentioned. Then you can make an informed decision as to what to do with the condominium.

Ilyce R. Glink’s latest book is “Buy, Close, Move In!” If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11 a.m. to 1 p.m. EST. Contact Ilyce through her Web site, www.thinkglink.com.

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Dion Haynes | November 19, 2013