What would you do: 20% down or less?

Question

Hi guys,

I've posted in the past regarding me and my wife's plan to purchase a new home and rent our current one out.  A new question that popped up is regarding how much money to put down on our new home.  We will (most likely) be using FHA financing to move into our new property and live in it for a year or so before we rinse and repeat so we have the ability to put less than 20% down.  Financially speaking we could do 20% (or close to it) , however what would you do in this position? I have heard different opinions regarding this and I would love to get your guys' take!

Daniel Pitner · Answer

@Alexander Flores I think you are right, I would come very close to losing money on the property if I sell it right now. I appreciate your input on this!

Alexander Flores · Answer

@Jason DiClemente Says it perfectly with over-leveraging can get you into trouble during tough times. The cash-out refinance we did on our one rental was only up to 70%, we got most of our money out of the property and within 6 months had the rest.

I like the HELOC since you do not need to use the money, it is only an option. Just make sure that when the HELOC ends that it does not turn into some type of mortgage product.

@Daniel Pitner Depends on the lender, I have heard people getting up to 100% on a HELOC if it is their personal residence. For an investment property, we have been able to get up to 80% on a HELOC.

IMO, I would rent the property out since only having 18k in equity if you sell it at 188k, you most likely would lose money when you factor in your closing costs from purchasing the property, your holding costs when you lived in the property and then the fees associated with selling the property.

If you can manage the property and make a return on renting the home I would do that. I would buy a new home and put 20% down or as close as possible. Then get a HELOC on my new primary residence to use in case I wanted to invest in a new property.

Shop around for everything, insurance rates, mortgage rates, HELOCs, renters.

Anything else let me know. I have a higher risk tolerance since I am young at 26, don't have kids, have not too many bills, make a decent income, live pretty frugally and my sister who is younger than me, smarter than me, makes more money than me and is better with her finances is a 50/50 partner. This may make my course of action different from yours.

Daniel Pitner · Answer

@Jason DiClemente The plan would be to invest the extra money at some point down the road in another property, most likely in two or three years. I would have it sitting in a mutual fund during the downtime.  My biggest scare is being over-leveraged; As a 24 year old I was only in 8th grade during the market downturn so I didn't feel any personal effects of the downturn, I only know what I've been told about it.

@Alexander Flores, these are some great points.  We want to grow at a steady rate, but not too fast.  I've thought about using a HELOC for our next purchase, but I'm admittedly not too informed on how a HELOC will work. How much equity do I need in a property to take out a HELOC? A question for both of you guys is "if you woke up in my shoes what would you do?" I'll give you some background:

We purchased our current home as a starter home before we first got married a little over a year ago. The purchase price was 170 and it is worth around 188 now and the mortgage on this is around $800/month. Before we moved in we rented it as a STR and, in my opinion, did decent with the return. For the four months that we rented it we would bring in around $1600 in revenue and that was in the heat of the Phoenix summer.

Would you purchase a new home and rent this one out? If so what criteria would you use to find the next property?

Thanks, guys!

Alexander Flores · Answer

@Daniel Pitner I am not a mortgage broker or anything but have used an FHA 203k to buy a home, helped my friends use an FHA loan and helped friends who did 5% conventional down on a home.

At the end of the day, it is a numbers game in my opinion. Using an FHA loan you will be paying upfront PMI at closing, which can add a significant amount to your closing costs depending on the purchase price of the home.

Also depends where you are at in your investing life. Are you planning on scaling fast or buying properties at a slower pace? You could put as much down as possible to save on the FHA extra closing costs, then take out a HELOC on the property to get your cash out if you need it for another property.

I have done cash-out refinances on an investment property but the closing costs were insane compared to the HELOC I a currently doing on another.

You will have to find the strategy that works for you, good luck!

If anything I said is wrong, please correct me.