I am looking for advice for the highest ROI over the long term. Here are my statistics:
Loan Terms: 30 year, 4.564% ($389/mo)
Renting for $1300/mo with approximately 50% expenses
Loan Terms: 15 year, 2.969% ($610/mo) with $390/mo for taxes/insurance
I want to buy more real estate, but I don't think we would be approved for another loan with our income limitations. I would like to buy another house before the 2 years of rental income is factored in...what are some of my options considering we do not have enough to buy a house cash?
I was thinking about doing a cash-out refinance, 30 year term, for my primary residence to pay down the rental house. What are the tax implications of doing this? Is their a tax break for rental property that I could take advantage of by not paying the rental off?
Please let me know your opinions.
Welcome to BP & the rental property game. Depending on what your house is worth, yes, you should be able to do a cash out re-fi from the 15 year to a 30 year mortgage. Your interest rate will go up. Depending on you exact situation, your payment could go down.
As far as I know there is no tax implication for taking money out of your house in a re-fi, it is your equity, you are just unlocking it with a mortgage & the bank is collecting the interest for providing that service.
I don't think I would pay down the rental, if it is making money the great, leave that one alone. Remember, if you add money to it, with out changing what you get out of it, then you are driving down your rate of return. Its like this, if you put $100 in and you are getting $10/month then you are making 10%/month, if you change that and put another $100 in, and still get the same $10/month you are now $200/10 or 5%/month.
Depending on how your DTI look will determine how willing a bank will be to talk. They look at both real estate & non real estate DTI. Also, talk to your local banks & credit unions, they tend to carry more loans in their portfolio so they are less bound by fannie/freddie rules and can be more flexible.
I'm with @Jesse Waters - talk to your credit unions and smaller banks before assuming you can't buy another cash flowing property. You may be surprised!
The first few years can be frustrating. I purchased 3 properties in a year and a half then ran out of DP money, since the banks were asking for 30% DP's. So, we started to get creative. Finally got to a point where I could afford 30% DP's then all my leg work on getting creative started to pay off. I found that one of my local banks would be willing to bundle all of my properties under one loan, allow me to purchase 3 more calling it all commercial lending & do it at 85% LTV, since I purchased my first 3 at 25-30% DP, its pretty much a nothing out of pocket deal.
So, hang in there, stick with it, get creative, just don't go over board or over leverage. Make sure that what every you propose doing can carry the debt load & meet your investment goals.
It depends on how much your houses are currently worth, I see you purchased them for $100k, but I am assuming they are worth more than that? You probably can qualify for a loan and if a lender tells you that you can’t I would keep looking. I have a lender that I use for my personal loans that thinks outside the box, but with all the regulations in Dodd frank here is what they advised me:
Regarding my current house (Primary): 30% Equity to offset payment with rental income for FHA purchase or 25% Equity for a conventional purchase.
Regarding my rental: same thing, income they can account 75% of rental price as income (in your case they would account $975/mo as income (1300*.75 = $975))
Debt to Income Ratio: 43% is her new limit
Savings: Need 6 months PITI (Full payment) in reserves after close for all financed properties, and two additional months reserves on the new primary if using a down payment less than 20%. These reserves do not need to be liquid, it can be 401k.
I hope this helps, it helped me! now I know what I need to do to get another house. Of course you can always do seller financing or raise money to find a deal, but if you just want to use a conventional lender this is what they advised me.
Jesse, I'm in SC visiting family. The market seems much different here than in Denver. :)
Did you start off with a property manager or did/do you manage your own properties?
@Justin Windham I have always used property managers. I'm out of town a lot for work and would be unable to keep things running as smoothly my self.
Hope you are enjoying your visit to SC, what part are you visiting?
@Jesse Waters We're visiting my mother-in-law in Walhalla (near Clemson). We're having a great time. Before this, my only exposure to SC was Myrtle Beach.
Enjoy your vist, please don't judge our state solely on Myrtle beach or South of the Border.
Thank you all for the replies. I really appreciate it. My goal for real estate is long term; I would like to use it to retire early.
Yes, I have equity in both houses. My primary home is worth $165k and my investment is worth $120k.
The main question from above that I would greatly appreciate being answered is the tax implications. Who has experience with this? If I were to pay off my investment, would I miss out on some tax savings or is it better to have the tax break on my primary residence?
I realize I am just moving money around, and this won't help my cash problem, but my plan is to buy a new primary residence and rent out my current primary home in the next step. So for the sake of long term planning, I figured having a lower interest rate on all my investments would be the better option.
I think the only tax implication I can think of is you wont be able to right off the interest. Personally, I would rather own more houses, but if you are afraid of paying off a house because of Tax write offs I would think it wont make much of a difference on a house that is worth 165k and I am assuming you interest rate isnt higher than 6%? you should of course always check with an accountant or tax attorney, because I dont know your entire situation.
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