Starting out w/ down payments
OK so I'm new and have a one year goal of finally getting into real estate investing.
My husband owns our house, and we have around $250k-$300k in equity in our home. We don't plan on being in this house long term but are not exactly ready to move out yet.
We have about 100k in 401k and 30k in savings. No credit card debt and excellent credit scores.
I guess my question is... do we sell now and take the equity to invest? Take a HELOC out to use as a down payment? Keep our current house, rent it out, and move to another house and use the home as our first investment opportunity?
I really just can't work out where to start financially as far as having enough for a down payment. Any advice would be very much appreciated!
Most Popular Reply
Hello Ro,
Renting out your current home can add extra income which can help you increase your borrowing power. It will depend on how much you need for your next primary residence if what you currently have in savings enough for down payment and closing cost then you should be good. Once you buy your next primary home and you plan to live there and move out after a year to buy your next property then you need to make sure your potential lease will cover your future Mortgage payment with Tax and insurance. Then continue to do the same with your future investment properties.
Ro,
This is a complicated bunch of decisions.
If you sell, I presume this has been a personal residence for 2 of the last 5-years. In that case, you and your husband, each have $250K (total of 1/2 Million) in 'exempt' capital gains. But you will still need a place to live and have that overhead cost.
This is a good time to connect with some professionals. 1. Real Estate Agent, 2. Tax planner, 3. Mortgage Broker.
Go to a website for National REIA dot org and find a local Association. You can find all of the above in that group...plus wonderful connections and educational opportunities.
Do not be locked into a one-year goal. Due diligence is how you will find the perfect solution...not a calendar deadline.
This is a very exciting time for you and your husband. Best, Janet
@Ro Minerd Congrats on setting a goal to get into RE investing... It definitely sounds like you've got a pretty solid financial foundation to start exploring your options.
You could use your 401k, although it's not "highly" recommended to use your retirement funds for investing however there are few ways you can do so without incurring significant penalties or tax issues. I'm no expert on this topic but here's a BP blog I found that may be of some help:
Real Estate Investing With a Solo 401k: How-To Guide | BiggerPockets
Selling your home and using the equity to invest can give you a significant amount of capital to work with, but it would also mean you would need to find a new place to live.
You could take out a HELOC to use as a down payment, but you would be taking on additional debt.
House hacking is another option to consider. With the equity you have in your current home, you could use it to finance a down payment on a property with multiple units and start house hacking.
What's important is that you determine a budget and an amount that you can afford to invest, this will help you narrow down your options and get clearer on your personal preferences.
@Janet Behm Was absolutely on point: "Do not be locked into a one-year goal. Due diligence is how you will find the perfect solution...not a calendar deadline."
Based on what you've said, I think I'd stay in the house until you ARE ready to move. It's a BIG ask to move and buy an investment at the same time. I'd use the HELOC to purchase the property with all cash and then refinance with permanent debt and pay off the HELOC.
The problem with using the HELOC as a down payment, is now you can't sell your main house. Let's say it's worth $700k and you have $300k in equity. You take out a $250k HELOC and use that as a down payment for the next house. Now you sell the main house for 700. In this example, 400 goes to pay off the 1st mortgage, 250 goes to pay off the HELOC and now you only have 50K to use as down payment for your next primary residence. Would be a serious downsize.
Not trying to be a buzzkill, just don't want you to get stuck in a bad situation.
If you're looking at investing in Atlanta, there ARE still lots of great rental property options at that price point, depending on what you're looking for. Would be happy to talk more, feel free to reach out!
Hi Ro,
Thats a great position to be in, but not without its challenges.
Benefits to selling:
- Your current equity will be tax exempt if sold under the primary residence exclusion.
- Selling can give you cash to buy both another primary home and an investment.
Challenges to selling:
- Your current home likely has an interest rate that you won't see again in your lifetime. Now you'll have two high(er) interest loans, or one high interest loan and one small rental paid in cash.
- Investor grade financing rates are very high right now which can reduce or eliminate the ability for free cash flow on a market rental, especially if purchased in rent-ready condition.
Benefits to keeping your house and renting it behind you:
- Low debt servicing costs may allow for increased cash flow to offset taking out another mortgage at a higher rate, until rates drop.
- Renting your property will allow for 75% of the gross monthly rent to be counted as income when qualifying for the next home.
- Owner-occupant grade financing is at preferred rates 1-1.75% below investor financing. This minimizes the total outflow paid in servicing costs.
My wife and I kept all of our properties as we moved and rented them behind us. We only sold them to reallocate the portfolio to another state. It worked as a solid strategy for us, but it also required moving a few times in the first 5 years before we got enough equity to start the refi and buy strategy.
Hello Ro,
Renting out your current home can add extra income which can help you increase your borrowing power. It will depend on how much you need for your next primary residence if what you currently have in savings enough for down payment and closing cost then you should be good. Once you buy your next primary home and you plan to live there and move out after a year to buy your next property then you need to make sure your potential lease will cover your future Mortgage payment with Tax and insurance. Then continue to do the same with your future investment properties.
Hey Ro - this really depends on your personal goals!
Lets make a few assumptions:
1. you're wanting to grow aggressively
2. you probably have a great rate or a nearly paid for home
3. you have more than enough in liquid reserves to cover all of your expenses (and then some) in case something goes wrong.
If you're wanting to grow pretty aggressively a HELOC might be a good option if you use it in a revolving matter. The amount of equity you have in your home is right around the PP of rental properties in the Atlanta Metro (that equity can go even farther if you look at markets further OTP). You're in a good position where you can make 'cash' offers at a price you can refinance into long term fixed rate debt after closing. After refinancing, you can repeat the process.
I would use caution when considering a HELOC as a down payment as this is debt, and floating rate debt at that.
With that being said, don't feel like you 'have' to do anything. You are in a great position and there is no need to rush!