Happy Humpday BP! I have a long winded question for you all.

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Happy Humpday BP! I have a long winded question for you all.

Terron Winn
San Diego, CA · Member since 2016 · 38 posts · 7 votes

Hello all, 

I am 32 years old and I would like to have financial freedom; with that being said, I am trying out Real Estate. It has always been the back of my mind but now I am ready to Jump into the waters; However, I dont know where to jump in at or how too. 

I am currently living in my home In San Diego, CA back in 2011 and I bought it for 209K. Now, this home is now has a market value of 380K and I only have a principle balance of 183K. (about 200K in equity) When I bought purchased, I barley made the DTI requirements with the skin of my teeth as I only bring in about 35K a year at the time. As of now, I only bring in about 45K a year. . . As I want to start investing with the equity in my home, I still think the DTI would impose a problem in trying to obtain another loan.

My first thought would be to take out about 100-120K of equity on my PR (if DTI allowed) and then purchase a new PR while renting out the first one. ( I already estimated cash flow on my first residence and it checks out)

Any other suggestions and or plans would be greatly appreciated. 

Thank you in Advance. 

Terron. 

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  • Michael J.
    Rental Property Investor · Louisville, KY · Member since 2008 · 342 posts · 123 votes
    10y

    In that area you should be able to get pretty good rents for a house you only owe 183k on right?

    I would do a lot of research and investigating before taking out a line of credit or doing a refi cash out. A heloc can have bad terms long term with short pay off and higher interest. If you can find another place to live in for a decent price in the area that will cash flow as a straight rental, maybe something you can rehab and add value to or a owner occupied 2, 3, or 4 plex, then your existing home might be a good source of extra income if you don't take out all the equity.

    if you OO a property you should be able to get by with a lower down payment and could repeat once a year.

    It really depends a lot on what you want to do with REI.

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  • KARLA V.
    Investor · Portland, OR · Member since 2016 · 5 posts · 2 votes
    10y

    At least in my experience, If you buy a rental property that is occupied & has a rental agreement that income will be considered by the lender & will help your DTI. This might also work if the property is vacant but the seller can show proof of a solid rental history, but I'm not 100% on that. Unless you have a renter & a signed rental agreement already on your current home, your future plans to rent it won't count as income and you'll need to show enough current income to cover the debt for both properties.

    Have you considered selling your current PR & using the profits a down payment on a duplex so you could live in & rent the other half? If it's really appreciated that much you're likely to owe taxes on the sale if you hold onto it for a few more years, and you will definitely owe taxes on the sale if you sell it after renting it out for more than 3 years after you move. If you sell it now you pull out the equity tax & interest free. I don't know prices in your market, but if you have a substantial down payment on a duplex because of the sale your monthly payments may be low enough. After a few years of good rental history in one unit that property's income would have a good effect on your DTI & you could qualify for another home for yourself and rent both units out.

    0Reply
  • Terron Winn
    OP
    San Diego, CA · Member since 2016 · 38 posts · 7 votes
    10y

    @Michael J. I would love to to be able to purchase a a 2,3 or 4 plex, however, that just seems out of my reach for now financially. Remember, I live in San Diego California and the median price range for a SF residence here is around 500K. I was just fortunate enough to buy my house after the bubble. Thats why I was able to buy my home at 209K and as I mentioned before, its now around 380K.

    A down payment for a 500K loan is about 100K and I do not have that kind of money anywhere else besides in the equity of my PR. I can do another FHA and but then I will be subjected to paying MPI again.

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    10y

    OK, another idea: rent out your current place, and *you* rent out a cheaper house somewhere else. So if you can rent your place out for say $3k, and you can rent another house for $1.5, you have just made $1.5k/month with the same amount of expenses (i.e., repairs on your house you would have had to make anyway, and repairs on the house you rent are the responsibility of the landlord). 

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  • Terron Winn
    OP
    San Diego, CA · Member since 2016 · 38 posts · 7 votes
    10y

    @JD Martin my story is a little complicated (to me anyways) but I can only rent my place out for about 2100 per month. I live in a community and almost of the residents have the same floor plan as I . I've seen two separate places in my community; both renting out for 2K and that is where I am getting that number from. I have also used rentometer and craigslist to help pinpoint the common rents in my area for a house similar to mine.

    What you have suggested is a great idea but unfortunately it will not work for me. Finding a house/apartment with the criteria I need usually falls about 2000 per month. 

    Any other suggestions? 

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  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    10y
    Terron Winn KARLA V. Terron if you sell your primary you don't have any capital gain taxes. For an owner occupied 4 plex the lender should count the rent from the rented or rentable units. They will want 20% down. So your sale proceeds should be around 140-150 k. ( After 10% sale cost) If you put 100k on the 4 plex and it cash flows then you still have a chunk left for another property. ( though probably not in California). . Bingo you are now living rent free and have 4 rentals. These numbers are really rough but can you see the strategy? If you can find the right multi family you could double or more your investment property's. Now after a year or two you establish yourself as a landlord on your income taxes and this will allow a lender to use rental / potential rental income as added income for your DTI. Also for the record there is no PMI for a loan when you have 20% or more down. If you refi and leave 20% equity in the property you won't have PMI. You probably wouldn't get more than 80% of your equity out as most lenders won't approve a loan more than 80%. If you want all the equity than you gotta sell. And it shouldn't hurt your taxes with Capitol gains. Check with your CPA. Remember equity is lost opportunity but at the same time it's security. A double edge sword if you will. RR
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  • David Dye
    Real Estate Investor · Torrance, CA · Member since 2015 · 186 posts · 45 votes
    10y

    @Terron Winn

    It sounds like you have a few options. However, it all depends on what YOU want to do. If you are happy in your place, you would take some equity out and go buy another place with 20% down (or you could do 15%). Keep in mind, you can use 75% of the rents to qualify for the new loan. So, as long as 75% of the rents cover the PITI, you are good to go. In order for you to find good cash flow, you may have to go a little outside the city (this is what I do up here in LA).

    If you are looking to move, you can totally house hack. It is possible to do a loan with less than 20% down and not have PMI because you can buy it out when you first structure the loan. While it may come at a higher interest rate, it is sometimes worth it because some borrowers know that they are going to refi fairly quickly thus making the higher interest rate is cheaper than the PMI (emphasis on the 'sometimes' it is really dependent on the situation how you structure your financing).

    In my opinion, I would rather have my primary residence leveraged out more than the investment property because the primary residence will get a better interest rate.

    Anyways, I know it is a little off topic but I hope it helps!

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  • Terron Winn
    OP
    San Diego, CA · Member since 2016 · 38 posts · 7 votes
    10y

    @David Dye I do have many options to choose from and that what makes it a little harder on where to go. I just want to make sure I am choosing the right/best choice. 

    What do you mean by my PR leveraged out? 

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  • David Dye
    Real Estate Investor · Torrance, CA · Member since 2015 · 186 posts · 45 votes
    10y

    Hey @Terron Winn

    I know I am going to catch a lot of heat for this post... Haha

    What I was getting at is that it is cheaper to leverage your primary residence over an investment property (i.e. have a higher LTV on your primary residence than your investments). Interest rates are cheaper if you are living in a property vs. renting it out.

    However, I do realize that this does not fit every investor's goal in terms of risk so you really need to look at your own situation and figure out how comfortable you are with the payments.  You want to make sure you leverage responsibly.

    Hope this helps!
    David

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  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    Don't stretch yourself too much ... I'd do a few things:

    1)Figure out how to increase your income ... this seems like it is the one element holding you up at the moment. You could switch jobs or take on side jobs (RE agent?).

    2)Start saving money the old fashioned way. Figure out what a new property would cost you out of pocket, subtract what the current property costs you, and save the difference. You are now saving and simulating your future expenses (ignoring rental cash flow to be conservative). 

    3)Take out a heloc on your home, but don't take any money out yet.

    4)Look for a fantastic deal in your local market. You may not be able to find it on MLS these days, so may need to door knock or direct mail or hud homes website (bid as owner occ to get in before investors).

    5)Do not, under any circumstances, buy anything that isn't a fantastic deal. This may very well mean waiting until the market softens up. If you do find a good deal, though, and you can afford it, then take out your down payment from the heloc.

    6)After purchase, move in, and fix up, the new place you can refinance the new and/or old property to take out the heloc and convert to long term fixed debt if you like.

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  • Terron Winn
    OP
    San Diego, CA · Member since 2016 · 38 posts · 7 votes
    10y

    @David Faulkner I can take out a HELOC loan but not utilize it and not pay anything for having the loan available to me?

    What about the house I am in now, do you also agree that I should REFI now?

    When would the income from my primary residence be counted towards the new mortgage when I obtain one?

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    10y
    Originally posted by @Terron Winn:

    @David Faulkner I can take out a HELOC loan but not utilize it and not pay anything for having the loan available to me?

    What about the house I am in now, do you also agree that I should REFI now?

    When would the income from my primary residence be counted towards the new mortgage when I obtain one?

     1. Yes. I have done this with my own banks. At least on the ones I have done there is a sunset on the line of credit, 60 months/84 months/120 months etc. (5/7/10 years). Some banks might revoke it if it's never used. 

    2. No opinion.

    3. One of my banks will use rental income when it shows up on a tax return. So if I rented something out in December they would consider 1 month of rental income as my annual income for that property. That means if I want to use rental income as a basis I'm generally looking at having the property rented for more than 1 year. I don't know if there's a specific rule on this because I use several different banks and they don't treat it the same; one wants 2 years of returns with verifiable income. 

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  • Terron Winn
    OP
    San Diego, CA · Member since 2016 · 38 posts · 7 votes
    9y

    Good Morning all, 

    As you may know I have been fighting this up hill battle in trying to turn my PR into a rental and then purchase another home for myself. 

    Thus far I have been told that I would not be able to do that because of my DTI and that the only way I would be able to qualify for a bigger home would be to sell my first and then seek a bigger PR. However; that is not what I want to do, I want to keep my first home and then purchase another one.

    Here is a little background on my situation:

    I bought my home in 2011 for 209k and paying 1460 a month plus $105.00 HOA fee (4.5 interest) . Currently, my home is now worth 390K but is still under MIP. As you can can see, I have equity and the home is still under FHA. My plan is to refinance out of FHA so I wont have to pay MIP in return I would be saving between 100-150 thus bringing down my mortgage.

    Secondly, I want to then rent out my place for 2100 per month, but this is where I have a few options. Either take out some equity and purchase another PR but I was told it would have to be a bigger PR than my previous or else the lender would not approve. Most homes a step up from mine are about 500 - 550K. (this is where I was told that due to my DTI, I would not be able to obtain another loan. Or I can go in with my friend and purchase a new home together. (Not favorable).

    Again, I could be making some money of my PR, (800 or so with out expenses.) but due to lenders rules, I cannot because of my DTI.

    Does anyone have any suggestions on what I can do?

    Terron 

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