Is there any hope for me?

Question

I have been on bigger pockets for a couple of weeks now a I have found all of you to be a wealth of solutions and answers so I thought I would share some details of my situation to see if there is any hope at all. I started studying real estate in 2008 where I spent my entire life savings and maxed my credit cards to learn from a Guru. Great education I will grant but I payed WAY to much for it (About 31K). I live in a home which a state program helped to get me into. This state program requires me to share 75% of my appreciated value when I sell. Additionally because of the strings attached I don't have the ability cash out any of my equity (but I do have quite a bit.) when I bought this house I knew nothing about real estate.  I am self employed which earns enough to pay the bills and gives me a lot of flexibility with my time. My credit score is fairly good (in the 700s) however I have a huge debt/income ratio in part because of the Guru Lessons but also because I co-signed my son's student loan to get him through college (about 56K). Wholesaling is illegal in my state. I know this because one of my colleagues received a cease and desist order from the State's Attorney General.  Fortunately for her they decided to drop the charges because she was so cooperative. We are a licensed lending state also. Any mortgages over 50K need to be underwritten by a licensed mortgage broker. We do have one company that will do it but they charge $500 and 2 points. The median home value here is about $250K. So what do you all think? Does anyone have any strategies for me?

Anthony Micklus · Answer

@William Hochstedler

Yes you are correct I do keep everything I paid down for the purchase price let me give you some real numbers.

House Purchased for 96K in 2000. Govt. Program gave me a grant for 15K and a 0% interest loan for 1.7K to help with closing costs. Total Mortgage Amount 80K financed @ 4.7%. In 2005 refinanced at a variable rate 25year note.  At last estimate (a drive by) the property was valued at 180K in 2012 I had to replace roof and windows that was a 2nd mortgage for 21K. Current balances Primary Mortgage 53K, 2nd Mortgage 18K I have to pay the 15K grant and the 1.7K loan when I sell this gives me a total of  about 88K I will need to pay back. If my calculations are correct I will get a maximum of $117K. After I pay the 88K that would leave me with 29K to work with on the purchase of a new house. And as I stated in the original post a HELOC is out of the question. I am not allowed to take one out on this type of setup. Also I can not rent the property out that is also against the lease agreement. I am about halfway through the schedule I will make my last payment in June 2030.

Mike H. · Answer

Based on what I read from his post, it looked like he was not able to take a HELOC out on this house because of the govt program restrictions. I was also assuming that they would not be able to get the principal paydown as well.

So if he paid 300k for the house and he pays the loan down to 250k, then when he sells for say 400k, he'll be able to keep:

75k. (50k for principal paydown and 25k of the 100k that the house appreciated).

I still say that the loss of appreciation is really a huge downside to this deal. Its likely the reason he has so much equity though because they probably help him buy the thing super cheap so he gets to have a nice house.

But if its really that much, then I'd still cash out what I could get and buy another house that I could get 100% of the appreciation. And also that I could take out a heloc against to start investing.

To be honest, the inability to take out a heloc on the current house is the real issue. I'm guessing if he could tap into that equity, then he'd have some money to go to town on his investing...... But without it, he can't or can't do it as easily.

William Hochstedler · Answer

To clarify, by them getting 75% of your appreciated value just means that they take a percentage of the difference between the original loan amount and the selling price, correct?

In other words, they don't take any of your principal reduction from your amortized payments. Is this right?

How much of your equity is principal reduction vs appreciation?  How far are you into the amortization schedule?  If you're more than half way, selling may not be the best option.

There may be creative ways of generating income or using equity from this property without selling it.  Is there anything stopping you from using @Mike H. 's method and taking out a HELOC on this house?

Mike H. · Answer

That 75% equity thing is a real kick to the stomach.

I hate to say it, but would it make more sense to sell your home and take the substantial equity you've built up now and use it to get into a house hack deal of your own where you get 100% of the appreciation going forward?

When you say substantial, I'm assuming you have 150k to 200k in equity.

If so, that would mean 40k to 50k would be yours.  I'd much rather take that money and find a deal for your own home. That should be enough of a down payment for most owner occupant loans.

And then, going forward, you would be accumulating 100% of the equity/appreciation of your home.

Here's the other thing. If you do it right, you should be buying a house at a discount.

So lets say you sell your house and make 40k. You buy another house for yourself for 300k thats worth 350k. You use the 40k as a down payment and your loan is 260k.

That means you now have 90k in equity and its all yours. And, if you want, because its your primary residence, you can get a HELOC against at up to 90% with some banks so you can pull out 55k to use towards investing.

Again, these numbers are completely made up but I'm just trying to give you an idea of what I would do if I were in your shoes. The fact that you're only getting 25% of the appreciation in your own and you're sitting on "quite a bit" of appreciation, makes me think  that now would be a good time to cash out of that house and move on to one where you are entitled to 100% of the appreciation going forward.

Historically speaking, real estate tends to double about every 20 years. So lets say your current house is worth 400k today. If it goes to 800k in 20 years and its paid off, you're going to be entitled to 500k of that money.  If you buy another house thats worth 350k, then in 20 years you'll be entitled to 700k.

In addition, if you buy another house, you'll be able to take a heloc out against your equity so you can buy more real estate.......

I started with a heloc of 43k and now have 32 rentals. So if you're wondering whether thats enough money to do something with, my answer would be yes... :-)