Questions about living in, fix up investments.
Hi, I'm basically a first time home buyer, bought a foreclosure for 123K in July 2015, put 5% down. Other comparable units in the area having been sold for higher, around 150K. I put in about 11K for repairs and upgrades.
So my question is actually two fold.
1) I've heard that at some point I should cash out refinance. I heard that I should live in the house for a year or 2. When would be an optimal time to cash out refi?
2) If I end up selling more than what I paid, say I sold for 150K, that would put me positive 10K. So my 2nd question is then, what is a good price range for homes to look at to do a 2nd live in + fix up to repeat this whole process?
Appreciate any feedback someone can give me.
Most Popular Reply
You can likely do a cash out-refinance right away...just be aware that you'll pay an additional set of costs for new appraisal and new loan. Sometimes the loan we already have in place is the best priced money we can obtain. Ask lenders around you and run your numbers.
The reason to stay in your house for 2 years out of 5 years relates to tax-free gains on an owner occupied property, that you later sell for profit. Look up "capital gains exclusion" or talk with your CPA about that.
Once you have a tenant for the house you just fixed up, your lender will count a percentage of the rental income so that you more easily qualify for the next mortgage. Often the lenders want to see that rental income on your tax return.
That said, moving into another owner-occupied house will produce the lowest down payments and interest rates. Your mortgage documents might say (read them!) that you must occupy this current house for a year before you move on and apply for another owner occupied loan. I like to use this strategy, and am happy to be a serial mover. Some we have rented out, some we have sold.
If you can move into a multifamily place next, such as a four-plex, that is a great way to get started producing increased cash flow. You can go up to 4 units on a conventional loan, while 5 units and up are in commercial lending. In that situation, you can have at least 3 other tenants paying the mortgage, sometimes allowing you to live for free while you garner more cash flow.
Good job on getting this deal done!