Posted by Ed Garcia on January 14, 2001 at 12:04:30:
Rachael,
There are a couple of ways you can do this. But before I tell you my answer Rachael, I want you to make sure that the lots are not on the same parcel as the house. If so, then you would have to sub-divide it. The reason I ask is because it’s a little unusual for FHA to finance the separate lots, if they’re not attached. You also mention that you would like to turn the house into a rental and that you would move if the house would rent with a positive cash flow. Rachael, with that thought in mind, since you are unattached to the house and just see it as an income stream. My suggestion would be to sell the house to pay off the mortgage, and keep the lots free and clear. You can build on them or sell them at a latter date.
Rachael, I’m sorry to say that I don’t know how good of a buy you made when you purchased the house from your landlord, so if you don’t have enough equity to do my first suggestion, then yes, sell off the lots to pay down the loan, so you can refinance it to lower the payments. You’re going to have to check with a CPA or your account for the tax ramifications, but yes you will be taxed.
Cork Horner recommended that I direct any questions about financing to you as he said that you know the industry inside out. Here is my scenario.
I am a 25 yr old female who has decided to embark on a career in real estate investing. In Novemeber of last year, my husband and I purchased a house that we were renting from our landlords for $85,000. Our landlords also had two vacant lots (50 x 100) next to the property that they wanted to sell. We purchased the land for an extra $10,000. At the time of the puchase we were low income and qualified for a FHA 3% down loan at 8.34% for 30 years.
We put $6000.00 down which was a gift from our Granma, so in truth we did not put any of our own money into the deal. The mortgage company we went through agreed to finance the house and land as one loan. The total loan is $95,000.00. Our monthly payments at the moment are $886.00 and I want to turn the house into a rental and the going rate for our area is $650-$750 per month. So as you can see I cannot even break even on this property. I want to refinance but I am considering selling the two lots of land to reduce the balance on the loan and hopefully reduce the monthly payments.
The mortgage company told me that I can refinance immediatately. How do I go about seperating the vacant lots in the financing??? Am I going to have to pay capital gains tax on the sale of the land? What do you think is my best option? I really want to buy another investment property to live in for a year and then turn that into a rental.
Do you have any advice for what I should do? Sorry about the length but I didn’t want to leave anything out.