My starter strategy

Buying & Selling Real Estate
13yFollow

My starter strategy

Nick B.
St. Paul, MN · Member since 2013 · 4 posts · 0 votes

I've been browsing BP for a couple of weeks now and have been pleasantly surprised by the quality of the community here. Thanks for making this place so valuable.

I am looking for advice. My wife and I own a home, purchased in early 2011 for $240k, and we currently have $220k left on the mortgage. It was a short sale, and we purchased at the very bottom of the market. Current interest rate is 4.8%, with a total monthly payment of $1850.

The house has appreciated to $315k. This is a realistic appraisal as we have closely been monitoring comparable Sold homes in our neighborhood. I am not exaggerating the value of our home.

We do not have children. Our combined income is $130k. 720 credit score. We have very little cash at this time, though our parents have offered to do a HELOC on their home that would allow us $130k.

Our goal is to sell our home for around $315k, which I think would net us roughly $80k. We would sell it ourselves. My wife just recently got her real-estate license. We would then rent a home. Then we would look for investment properties which we would buy, refurb, hold, and rent. We would use the $80k from our home sale and potentially the $130k from parents HELOC.

Please let me know what you think. I value your input. Thank you,
Nick

0Reply
23 views

Most Popular Reply

David Beard
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
13y

I would also not be so anxious to sell, if you like the neighborhood. With rates so low, it's just a fantastic time to lock in your home for the mid to long term. You DO need to refinance out of the FHA loan. With the jump in home value, you now could get an 80% LTV loan and get rid of the MIP. You could potentially get a $250K loan, put $25-30K in your pocket, and lower your PITI to $1,500 or less.

I would pay the minimum on the student loan debt, and do everything you can budget wise to free up funds for investing.

Couple of points on your buy-rehab-rent-refi plan:

* If you use funding from your parents, which is perfectly reasonable, it is critical to record a mortgage in their favor, along with executing a note. The mortgage is critical so that when you go to refinance the new property, it will be a no-cash-out refinance, not a cash-out refinance. The former can be obtained in as little as 4-6 mths after you purchase the property, the latter might take a year. And cash-out refinances can't even be done once you have 4 financed properties ( conventional loans, that is).
* Make sure that the mortgage and borrowing is for a sufficient amount for both the purchase+rehab.
* Make sure that you have your "take-out" lender lined up and briefed on your plans, and that they have indicated they can do the refinance as you expect. Some lenders do not want do to a no-cash-out refinance when the current mortgagee is an individual (particularly a relative). They might force the loan to be treated as a cash-out refinance. It may be necessary for your parents to set up an LLC and lend from the LLC. You may need to talk to several lenders to find one that will permit this to be treated as a no-cash-out refinance. If you don't clarify all this with your take-out lender up front, you may be stuck in the property for a year before you can get your funds out. Make sure you pay your folks a competitive rate of 6-7%.
* Lenders do not want to give you credit in your Debt-to-Income ratio for rental income until you have two years of landlording experience. They'll force you to carry the PITI in your debt number. So you will need to monitor your DTI ratio closely until you have the two years experience. If you buy something in 2013, you will officially have two years when you file your 2014 taxes in early 2015.

2Reply
See this reply in the discussion

7 Replies

Jump to latestLatest
  • Marco Santarelli
    Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
    13y

    Hi Nick B.

    Welcome to BiggerPockets!

    Your plan is "fine" if that's what you really want to do, however, if you are considering to sell your home simply to free up the cash in order to buy-and-fix a property, then you may want to consider using a hard money load to help. The same is true regarding the HELOC - you could spare your parents from taking out a HELOC and use hard money.

    Just my two cents without knowing more about your target market.

    Continued success!

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    Hi Nick,

    I do not want to get in your business but if you do not have children and have no savings from making 130,000 a year as a couple then I would evaluate things a little more closely as to where all that money went.

    Now if you invested in other things like stocks etc. and have been saving that money that is good. If you haven't been saving almost anything from the 130,000 a year combined income then the lifestyle might need to be ramped down.

    Me and my wife for instance live on 3,000 a month combined. I could spend more but I choose not too. I re-invest and only live on a portion of the income coming in. I am conservative so I only ramp up to use about 20% of gross earnings each year max but often am lower. So if I make 300,000 I wouldn't go over 60,000 in living expenses.

    As you invest you will create a snowball effect where you can keep upping your standard of living with being inline with conservative numbers. This keeps you safe and doesn't let you overextend yourself.

    Maybe you can move to a rental that is much less than the 1,850 a month you pay now. Also maintenance runs about 1% a year to keep in good shape so you can save thousands that way. The downside is rental go up every year typically in what they charge. If she is getting her license is she quitting her job or just having it for access to properties??

    Are you investing for retirement or to eventually quit both of your jobs??

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Nick B.
    OP
    St. Paul, MN · Member since 2013 · 4 posts · 0 votes
    13y

    @Marco Santarelli - We would be selling our house primarily to free up cash and to discontinue the $1850 monthly payment. There are a lot of things we love about our home and we are slightly emotionally attached. However the potential benefits outweigh the negatives. I'm not familiar with a hard money loan, I will need to do some research on that. Our goal is to eventually buy and rent enough properties to replace one of our incomes. Thank you Marco for your response.

    @Joel Owens - Yes it is a little embarrassing to share that we make so much yet have little cash. The excuses (some poor) that I have are: 1. We are not as frugal as we could be, 2. We are aggresively been paying down student loan debt, 3. We did not take our loans for my wife's masters program, 4. We did not take out loans for our overly expensive wedding, 5. We are in our mid/late 20's.

    We would temporarily move to the rental until we can identify a profitable investment property. We would move into it, rehab it, and then rent it out, and continue the cycle (not move into each one though).

    She got her license for education, potential cost-savings for us when we buy and for friends/family when they buy, and for access to properties (I'm not sure if that does give us extra access to properties though?) Thank you Joel for your response.

    0Reply
  • David Beard
    Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    13y

    I would also not be so anxious to sell, if you like the neighborhood. With rates so low, it's just a fantastic time to lock in your home for the mid to long term. You DO need to refinance out of the FHA loan. With the jump in home value, you now could get an 80% LTV loan and get rid of the MIP. You could potentially get a $250K loan, put $25-30K in your pocket, and lower your PITI to $1,500 or less.

    I would pay the minimum on the student loan debt, and do everything you can budget wise to free up funds for investing.

    Couple of points on your buy-rehab-rent-refi plan:

    * If you use funding from your parents, which is perfectly reasonable, it is critical to record a mortgage in their favor, along with executing a note. The mortgage is critical so that when you go to refinance the new property, it will be a no-cash-out refinance, not a cash-out refinance. The former can be obtained in as little as 4-6 mths after you purchase the property, the latter might take a year. And cash-out refinances can't even be done once you have 4 financed properties ( conventional loans, that is).
    * Make sure that the mortgage and borrowing is for a sufficient amount for both the purchase+rehab.
    * Make sure that you have your "take-out" lender lined up and briefed on your plans, and that they have indicated they can do the refinance as you expect. Some lenders do not want do to a no-cash-out refinance when the current mortgagee is an individual (particularly a relative). They might force the loan to be treated as a cash-out refinance. It may be necessary for your parents to set up an LLC and lend from the LLC. You may need to talk to several lenders to find one that will permit this to be treated as a no-cash-out refinance. If you don't clarify all this with your take-out lender up front, you may be stuck in the property for a year before you can get your funds out. Make sure you pay your folks a competitive rate of 6-7%.
    * Lenders do not want to give you credit in your Debt-to-Income ratio for rental income until you have two years of landlording experience. They'll force you to carry the PITI in your debt number. So you will need to monitor your DTI ratio closely until you have the two years experience. If you buy something in 2013, you will officially have two years when you file your 2014 taxes in early 2015.

    2Reply
  • Nick B.
    OP
    St. Paul, MN · Member since 2013 · 4 posts · 0 votes
    13y
    @David Beard
    We recently tried to re-finance and through that effort did discover we could get 80/20 LTV, however contract states we are required to pay MIP for 5 years. I haven't read that clause in our contract myself, but the person we were working with made us aware. Do you know if the required 5 years of MIP is common practice? Is there any possible way to not pay MIP with it being in contract? Even with the MIP, could we still potentially refinance at a lower rate, and obtain the $25-30k?

    We do plan on fairly compensating our parents for the loan, I appreciate that you stressed this point.

    Thank you for your response David. I feel like I'm getting professional advise, and will contribute to the community here in the future.

    0Reply
  • David Beard
    Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    13y

    Nick, the monthly MIP goes away when you refinance. FHA has minimum time periods for paying MIP while the loan is in force. So you couldn't just pay down your FHA existing loan to 80% LTV and petition the lender to drop it. And the FHA is getting even worse with these minimum-MIP periods, in order to shore up their guaranty fund. But if you refinance, it's gone. Did your loan officer give you this info?

    At the 80% LTV on a new loan, you will not go FHA, you will get a conventional loan with no mortgage insurance premium. Yes, you can do a cash-out refinance and get the money.

    0Reply
  • Nick B.
    OP
    St. Paul, MN · Member since 2013 · 4 posts · 0 votes
    13y

    The person we were working with was not a loan officer. He may have been misinformed and that is why he said we would need to pay the MIP for the next 3 years. It seems that I need to talk to a professional loan officer about our situation and reduce the monthly mortgage, while making available some funds for an investment property. Thank you David.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free