Looking to buy home then turn it into a rental property. How would this work If I want to buy another house to live in?

Asked by bwrubbi, Englewood, CO Fri May 17, 2013

I am currently starting to look into buying a townhome in the next year and a half. I would like to be in the home for approx. 5 years then buy a more permanent home and rent out the townhome. I have spoken with a few people and they have told me to beware of the type of mortgage I get to do that but didn't have many anwers. Can someone enlighten me please?

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Sean Young, Mortgage Broker Or Lender, Greenwood Village, CO
Thu Jul 11, 2013
If your intent is to occupy the property and assuming you qualify with income and credit you should have no issues getting into a Conventional, FHA or VA loan if you are VA eligible.

When you do buy your next home and rent out the town home you may need to qualify for both payments unless you have 30% equity in your town home and a renter in place.

The following is from Fannie Mae's guidelines: https://www.fanniemae.com/content/announcement/0816.pdf

Conversion to an Investment Property:
Fannie Mae will continue to permit up to 75 percent of the rental income to be used to offset the mortgage payment in qualifying if there is documented equity of at least 30 percent in the existing property (derived from an appraisal, AVM, or BPO, minus outstanding liens).

The rental income must be documented with:
• a copy of the fully executed lease agreement; and
• the receipt of a security deposit from the tenant and deposit into the borrower’s account.

If the 30 percent equity in the property cannot be documented, rental income may not be used to offset the mortgage payment. ƒ Both the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction; and 6 months of PITI for both properties is required to be in reserves.

Note, that some lenders don't require this if they are using or are a portfolio lender.

Best wishes and good luck,
0 votes
Chad Bergman, Mortgage Broker Or Lender, Lakewood, CO
Sat May 18, 2013
Here's the quick answer.

If your intent is to purchase the property as a primary home then you are likely fine with most lending programs. (FHA and VA dont allow for investment Purchase).

If you end up turning the property into an investment at a later date and the mortgage is FHA or VA insured, then you will be limited in using those programs in the future. there are some exceptions, and too many to list on this blog.

Let me know if I can help or elaborate. Chad Bergman, CML

Sr. Mortgage Banker
Pinnacle Mortgage Group, Inc.
Direct 303-996-4899
Cell 303-875-2240
Efax 720-975-1154
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Austen Rosen…, Agent, Lakewood, CO
Sat May 18, 2013
I've worked with many people doing the same thing. I can give you a long-winded answer on here and hope that you see it, but I would rather have you call my cell any time so we can chat. 720-496-9618. Austen Rosenthal
0 votes
Julie Reddin…, , Highlands Ranch, CO
Sat May 18, 2013
Talk to a Lender first and they can give you the best scenerios for you. My guy is great !! Many of my clients are doing the same thing and we make a great team getting the deal done. Call me with any questions.

720 226 4168
0 votes
Jan Baer, Agent, Littleton, CO
Sat May 18, 2013
Smart Plan and Good for You!
Purchase the town home as your primary residence with a conventional/other loan and enjoy living there until you are ready to trade up to a house and then convert your town home into a Rental Investment property. Your lender of choice, can better answer the financial questions associated with your loan. I personally own several rental properties, manage them myself and know 100% for sure that rental properties are an excellent vehicle for building wealth and saving for retirement, college funds etc. Please do not hesitate to contact me if you need Real Estate investing help or a free consultation. I am a Full Service Realtor and happy to help you in any way Cheers Jan Baer Jannobaer@Gmail.com and phone 303-931-5853
0 votes
Robert McGui…, Agent, Denver, CO
Fri May 17, 2013

Good question and a good plan. This is certainly workable. I mostly depends on your credit, the amount of equity in the townhome, the projected rent at that time, and the lending guidelines now and the guidelines 5 years from now. The best person to talk to is a lender experienced in this type of investing that can look at your particular credit profile. My best lender is Joe Massey - 303-809-7769. He is very familiar with this senario and can tailor a program for you. Let me know if I can help.

Robert McGuire
Your Castle Realestate
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