Buying a new residence while renting out former place

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Hi,

I am looking to buy a new place, but want to keep and rent out my current townhouse. My townhouse has a loan with 230k principal left, and the house is worth about 560k. I'm paying 3.86% apr on a 30 year fixed. My monthly mortgage, HOA, taxes and insurance come out to about 2050. I feel confident I can rent the place for at least 2500/mo. I live in a very trendy area of Los Angeles where rental vacancies are very low.

The homes I'm looking at are in the 700k range. I make about 240k/yr, and have approximately 100k in liquid assets. I want to make sure I always have at least 60k in liquid assets in savings, in case of an emergency. I want to put 40% down on the new house, simply because a high mortgage debt obligation scares me. That means I'd have to put 280k down for a 700k house.

To ensure I have 60k in liquid assets, I'd only have 40k to put down unless I tap into the equity of my current townhouse, which - as I mentioned - has 330k in equity in it. If I want 240k of that equity, which I can add to the 40k in liquid assets down payment, what is my best way of going about that. If I do a cash out refi, wouldn't I risk a higher rate? And also, wouldn't that offset my desire to keep my mortgage payments low?

Does it make more sense to just put 20% on the new place and take out a new loan? I'm guessing that would result in a higher interest rate since my original house wouldn't provide any collateral. And even if I wanted to only put 20% down, I'd still have to either borrow from my 401k, roth Ira, or pull equity out of my townhouse.

I'd like suggestions on how to best approach this scenario... Buying a new house, holding on and renting the old place, and tapping into the old house's equity to make this magic happen.

Thanks.

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roboCarterman said:   Hi,

I am looking to buy a new place, but want to keep and rent out my current townhouse. My townhouse has a loan with 230k principal left, and the house is worth about 560k. I'm paying 3.86% apr on a 30 year fixed. My monthly mortgage, HOA, taxes and insurance come out to about 2050. I feel confident I can rent the place for at least 2500/mo. I live in a very trendy area of Los Angeles where rental vacancies are very low.

The homes I'm looking at are in the 700k range. I make about 240k/yr, and have approximately 100k in liquid assets. I want to make sure I always have at least 60k in liquid assets in savings, in case of an emergency. I want to put 40% down on the new house, simply because a high mortgage debt obligation scares me. That means I'd have to put 280k down for a 700k house.

To ensure I have 60k in liquid assets, I'd only have 40k to put down unless I tap into the equity of my current townhouse, which - as I mentioned - has 330k in equity in it. If I want 240k of that equity, which I can add to the 40k in liquid assets down payment, what is my best way of going about that. If I do a cash out refi, wouldn't I risk a higher rate? And also, wouldn't that offset my desire to keep my mortgage payments low?

Does it make more sense to just put 20% on the new place and take out a new loan? I'm guessing that would result in a higher interest rate since my original house wouldn't provide any collateral. And even if I wanted to only put 20% down, I'd still have to either borrow from my 401k, roth Ira, or pull equity out of my townhouse.

I'd like suggestions on how to best approach this scenario... Buying a new house, holding on and renting the old place, and tapping into the old house's equity to make this magic happen.

Thanks.

  If you are making 240k/year, how much do you save each year?
You should be able to save another 40k in short order to get the 20% (140k) down on a 700k house.

Get a HELOC on the current house and tap into it in case of emergency.
 

Saving 40k is not as easy as it may sound. First, I only make about 160k in salary. My bonus, which comes once a year in December, accounts for the other 80k. So, at this time of year, I can only tap into the 160k. On a monthly basis, I take home about 6k after taxes, 401k and insurance premium payments.

With that 6k, I have to pay my car payment, mortgage, HOA, house and EQ insurance, typical bills, medical, IRA contributions, and any extracurriculars. That leaves me with roughly 1500-1800/ month savings. So I wouldn't have 40k in the near future, that is, until I get my bonus in December.

So again, to buy a new place and rent out the old one, I still need to come up with at least a 20% down payment, which is 140k. I'd need to find another 100k (to go with 40k from my current savings I'm willing to contribute) to put down the full 20%. It seems that the easiest way to do that is to draw from my home's equity. But in which manner to do that, I am not entirely sure.

As fwuser12 mentioned, a HELOC is your best way to go. It is great for emergencies and for things such as this where you need quick cash. It sounds like you can pay it off again in December, which is all the better.

You can't afford your new property unless you sell your old property. By drawing on equity in your current townhouse you'll increase your monthlies on that property and decrease it's positive cash flow (think of any issues that may arise you'll have to pay for, i.e. 1% of property value for repairs) and that's assuming 100% rental and 0 vacancy even though you'll probably spend at least 30 days looking for a tenant each time one leaves, or on initial leasing. Save your pennies and buy when you get your next bonus or when you can save the cash, is the bonus gaurnateed? What if you don't get it next year, can you afford your 700k house on a 160k salary?

I know this isn't what you want to hear so..

Get a HELOC on the townhouse to cover the remaining 20% down you don't have. That would eliminate closing costs of a refi or sale and get you where you need to be.

ANOTHER POINT OF CONTENTION THOUGH. You haven't rented the townhouse meaning you may not qualify for both mortgages at the same time. A rental property must be rented out for a period of time before it's rent (I believe 70%?? Someone correct me) can be added as income to qualify for a mortgage. Are you pre-qualified and are you sure you can afford the mortgage on both places in the event of a "rental drought"

Ma171aC said:   

ANOTHER POINT OF CONTENTION THOUGH. You haven't rented the townhouse meaning you may not qualify for both mortgages at the same time. A rental property must be rented out for a period of time before it's rent (I believe 70%?? Someone correct me) can be added as income to qualify for a mortgage. Are you pre-qualified and are you sure you can afford the mortgage on both places in the event of a "rental drought"

 A few banks that I applied to required at least 2 years of rental income for it to count.  If OP is looking for a conventional mortgage, he/she might not qualify because I believe that is a FNMA/FMCC requirement.

Qualifying for a mortgage when you have rental property hasn't involved any percentage formulas for me. I've heard of that too, maybe that was a thing 10+ years ago. But for me, it's treated as a small business. They will use tax returns to determine if you have net income or loss. They do factor out depreciation, but a couple of times I've had to Coach brokers on also backing out mortgage payments - or excluding those from general debts in their DTI calculations.

So it's pretty straightforward and sensible, but won't count for anything until you have a couple of years of tax return history. Until then, you just need your other income to cover the rental expenses and keep you at DTI qualification.

And "it's hard to save because 1/3 of my income is paid as a year end bonus" makes no sense. Has the bonus varied a lot, or you've only recently been making around $240k? Your housing costs seem modest given that income and your location, but I don't see the stacks of savings I'd expect from that.

roboCarterman said:   Saving 40k is not as easy as it may sound. First, I only make about 160k in salary. My bonus, which comes once a year in December, accounts for the other 80k. So, at this time of year, I can only tap into the 160k. On a monthly basis, I take home about 6k after taxes, 401k and insurance premium payments.

With that 6k, I have to pay my car payment, mortgage, HOA, house and EQ insurance, typical bills, medical, IRA contributions, and any extracurriculars. That leaves me with roughly 1500-1800/ month savings. So I wouldn't have 40k in the near future, that is, until I get my bonus in December.

So again, to buy a new place and rent out the old one, I still need to come up with at least a 20% down payment, which is 140k. I'd need to find another 100k (to go with 40k from my current savings I'm willing to contribute) to put down the full 20%. It seems that the easiest way to do that is to draw from my home's equity. But in which manner to do that, I am not entirely sure.

We're only at February 9, 2017. Are you saying you burned through your $80,000 2016 year end bonus already? In something like 2 months?

taylor0987 said:   
roboCarterman said:   Saving 40k is not as easy as it may sound. First, I only make about 160k in salary. My bonus, which comes once a year in December, accounts for the other 80k. So, at this time of year, I can only tap into the 160k. On a monthly basis, I take home about 6k after taxes, 401k and insurance premium payments.

With that 6k, I have to pay my car payment, mortgage, HOA, house and EQ insurance, typical bills, medical, IRA contributions, and any extracurriculars. That leaves me with roughly 1500-1800/ month savings. So I wouldn't have 40k in the near future, that is, until I get my bonus in December.

So again, to buy a new place and rent out the old one, I still need to come up with at least a 20% down payment, which is 140k. I'd need to find another 100k (to go with 40k from my current savings I'm willing to contribute) to put down the full 20%. It seems that the easiest way to do that is to draw from my home's equity. But in which manner to do that, I am not entirely sure.

We're only at February 9, 2017. Are you saying you burned through your $80,000 2016 year end bonus already? In something like 2 months?


 

Well, that 80k turns into 48k after taxes, and no, I didn't burn through all of it.  As I said, I have savings, and that's part of it.  I put almost 80k into my townhouse last year to update it, so that's where a lot of my cashflow went.  I'm confused as to why it would be better to take out a HELOC vs a Home equity loan vs a Cash Out refi?  With 230k left on my principal, what's the downside of doing a cash out refi for 330k to get 100k in cash?

To the poster who asked whether my bonus is guaranteed - it's not, but I have Long term incentives that are, and that represents about 1/3 of my bonus.  Also, in buying a new place, I'd be doing so because of a new job, which would pay $300k/yr, before bonus.  I'm guessing it'd be a challenge to convince a mortgage broker to give me a second mortgage if I'm just starting at a new job, HOWEVER, it will involve a three year contract of guaranteed money.

Ma171aC said:   You can't afford your new property unless you sell your old property. By drawing on equity in your current townhouse you'll increase your monthlies on that property and decrease it's positive cash flow (think of any issues that may arise you'll have to pay for, i.e. 1% of property value for repairs) and that's assuming 100% rental and 0 vacancy even though you'll probably spend at least 30 days looking for a tenant each time one leaves, or on initial leasing. Save your pennies and buy when you get your next bonus or when you can save the cash, is the bonus gaurnateed? What if you don't get it next year, can you afford your 700k house on a 160k salary?

I know this isn't what you want to hear so..

Get a HELOC on the townhouse to cover the remaining 20% down you don't have. That would eliminate closing costs of a refi or sale and get you where you need to be.

ANOTHER POINT OF CONTENTION THOUGH. You haven't rented the townhouse meaning you may not qualify for both mortgages at the same time. A rental property must be rented out for a period of time before it's rent (I believe 70%?? Someone correct me) can be added as income to qualify for a mortgage. Are you pre-qualified and are you sure you can afford the mortgage on both places in the event of a "rental drought"

-----

There aren't rental droughts in Los Angeles in my area.  The property is highly sought after, and even if I had to drop the rental price by a few hundred dollars, I'd still be cash positive, which is very rare on an LA property.
 

  

SlimTim said:   Qualifying for a mortgage when you have rental property hasn't involved any percentage formulas for me. I've heard of that too, maybe that was a thing 10+ years ago. But for me, it's treated as a small business. They will use tax returns to determine if you have net income or loss. They do factor out depreciation, but a couple of times I've had toCoach brokers on also backing out mortgage payments - or excluding those from general debts in their DTI calculations.

So it's pretty straightforward and sensible, but won't count for anything until you have a couple of years of tax return history. Until then, you just need your other income to cover the rental expenses and keep you at DTI qualification.

And "it's hard to save because 1/3 of my income is paid as a year end bonus" makes no sense. Has the bonus varied a lot, or you've only recently been making around $240k? Your housing costs seem modest given that income and your location, but I don't see the stacks of savings I'd expect from that.

  I've been making over 200k for a few years now.  But I've also put about 80k into my current home.  After taxes, that 240k is really only 160k.  Then I put 22k into retirement.  Medical bills are 4k.  Car is 5k a year.  Mortgage is 16k/yr. Vacation runs 10k/yr.  Gym memberships and all other extracurriculars cost a lot in LA. Put all that together, and I probably save 25-30k a year, of which I invest most of it (but in fairly liquid stocks)..

roboCaterman=Caterman32. Wonder what's with the similar alt?

Regardless, I just hit this blockade myself. We want to rent out our condo and buy a new home. Even with 20-30% down in cash, we can't get a mortgage [for the sum we desire] because our condo mortgage (with lack of rental income) puts us over FM 45% DTI.

Carterman32 said:   
taylor0987 said:   
roboCarterman said:   Saving 40k is not as easy as it may sound. First, I only make about 160k in salary. My bonus, which comes once a year in December, accounts for the other 80k. So, at this time of year, I can only tap into the 160k. On a monthly basis, I take home about 6k after taxes, 401k and insurance premium payments.

With that 6k, I have to pay my car payment, mortgage, HOA, house and EQ insurance, typical bills, medical, IRA contributions, and any extracurriculars. That leaves me with roughly 1500-1800/ month savings. So I wouldn't have 40k in the near future, that is, until I get my bonus in December.

So again, to buy a new place and rent out the old one, I still need to come up with at least a 20% down payment, which is 140k. I'd need to find another 100k (to go with 40k from my current savings I'm willing to contribute) to put down the full 20%. It seems that the easiest way to do that is to draw from my home's equity. But in which manner to do that, I am not entirely sure.

We're only at February 9, 2017. Are you saying you burned through your $80,000 2016 year end bonus already? In something like 2 months?


 

Well, that 80k turns into 48k after taxes, and no, I didn't burn through all of it.  As I said, I have savings, and that's part of it.  I put almost 80k into my townhouse last year to update it, so that's where a lot of my cashflow went.  I'm confused as to why it would be better to take out a HELOC vs a Home equity loan vs a Cash Out refi?  With 230k left on my principal, what's the downside of doing a cash out refi for 330k to get 100k in cash?

To the poster who asked whether my bonus is guaranteed - it's not, but I have Long term incentives that are, and that represents about 1/3 of my bonus.  Also, in buying a new place, I'd be doing so because of a new job, which would pay $300k/yr, before bonus.  I'm guessing it'd be a challenge to convince a mortgage broker to give me a second mortgage if I'm just starting at a new job, HOWEVER, it will involve a three year contract of guaranteed money.

A refi is going to cost you on the front end or the back end.  A home equity loan is a fixed loan amount you get now and can't continue drawing on.  A HELOC is a line of credit on your equity and you can draw and pay back as needed.  It'll be a cushion really. 

If you have a 3 year contract give that to your broker as "verification of income" but it seems like leaving that out of the initial post is weird.  I'm a fan of not doing what you're doing for atleast 6-12 months.  That gives you another 50k (after tax) bonus for a downpayment AND apparently you don't even need it as you'll be pulling 300k a year instead.  

Heloc is the best, cheapest, and easiest since you dont need to worry about meeting the DTI requirements like when you do a hel or cash out refi. All you have to do is show you can make the piddly squat interest payments which you can satisfy with your cash savings alone.

I am in exactly the same predicament... Interested if others have come up with creative ways to finance their next property while living in their own and/or renting out their own home. Trying to go from 1 property to 2.

OP I'm lost on your fuzzy math. If you take out 240 out of the 330 equity you have in you current house your monthly payments are no longer 2050 on it. Taking out a HELOC or home loan still needs to be repaid which increases your monthly payments. You can't magically take money out of the house, you use it as collateral for a loan that you take money out of your house.  Basically, sell the old house for your down payment if you insist on putting 280k on your new house or save up money now for your down payment.

We've made the hop twice. Both times, it boiled down to staying within DTI limits without any presumed rental income on the property we were moving out of but keeping. The first time, we had a healthy HELOC with no balance on our residence. In hindsight, maybe we got more leeway than we should have. Our broker knew that the down payment for the new home was effectively all coming from that heloc line. They said that was fine since it was a secured loan that even at a full draw was within safe LTV limits. So it was not a problem as other kinds of borrowed down payment funds can be. But when we applied and were approved, there was no balance, and I wonder if it was never factored into DTI calculations. Maybe so, the primary mortgage balance was small and had pretty low tax & insurance expenses too.

The second time, we made use of a 401k loan for part of the down payment, which did require a bit over 25% to make the lenders agreeable. But the 401k loan did not factor into the dti calculations at all. I asked our broker about it specifically, and he did a little research and confirmed this would happen. Maybe because while payments were due, I also had options to take yet another loan, or suspend contributions, or just 'default' and only owe tax & penalty instead of the principal. We did not want to make such a large down payment, but for the initial purchase loan, had to accept it temporarily. Later, heloc or cashout refi is feasible to return to your preferred long-term situation for loans and cash reserves.

In both cases, we probably had 0 other debt. No car payment, and probably not even a credit card balance on our daily spender cards. Again, we'd temporarily clear out even a 0% balance and send payments on our active cards just before statement closing. A card with a big balance and 3% minimum payment can be an obstacle if you're pushing the DTI limit. And it can't hurt to temporarily have a ridiculous credit score when the lenders take their looks. The loan options and rates have inflexible score ranges, but they notice when you're 50 points above their top tier requirements and always seemed helpful and optimistic that surely there was a legit way for these to work out.

Another tool that might work for some is a margin loan. These don't show up on credit reports and really don't even have something like a monthly payment. It wasn't a direct part of our purchase loan situations, but has been around for multiple refinances since, and it's just not a factor. We just subtract it from the asset balance to provide a net value for those investment accounts on the applications.

Wasn't there a thread super similar to this a couple weeks ago?

https://www.fatwallet.com/forums/finance/1552656

Wasn't there some talk in that thread about whether it was a good investment to turn the 1st place into a rental or not? Can anyone do that same analysis here?

Renting a 560k house for $2500/mo doesn't seem like a worthwhile investment to me, regardless of the net $400/mo cash flow. 1 month of vacancy would wipe out 6 months of income.



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