New Investor - should I refinance my house?

Question

Hello Everyone! My husband and I are new to real estate investing. We bought our first home in 2014 in Stamford, CT with a CHFA loan because we didn't have enough money for a big down payment. We were just recently able to remove the PMI because we reached 20% equity through making home improvements ourselves. Now we are looking for more ways to save money because we would like to start buying more properties. Additionally, we were thinking of renting out our current home and moving into another fixer-upper. So I'm looking for nice/positive advice on these two potentially naive questions...

1. With our CHFA loan, are we even allowed to rent our house out? I obviously need to look back over our purchase documents, but I remember when we purchased the house there were several rules we had to abide by (we had to owner-occupy the house, for one, and there were some big tax penalties if we wanted to sell within 10 years).

2. I'm not the best at finance...would it make sense to refinance our current home to lower our monthly mortgage payment so that we could cover our costs if we rented out our home?

Thank you so much in advance for any pointers you can give to this complete newbie!

Anthony Dooley · Answer

@Lindsay Iordache wouldn't it be just as easy to buy a fixer-upper, fix it, then rent it out? Instead of moving into the investment, simply buy an investment property. This usually cash flows better than a property that you paid retail price for, with 20% equity. I would look in a less desirable neighborhood than where you live. People looking to rent, probably don't drive down your street. I'm guessing. I'm not suggesting a terrible area of town, but a less expensive area for a house that is outdated, dirty, needs paint, carpet, appliances, and new flooring. A foreclosure or a tired landlord property that is not listed on the MLS. This is where I would look. Best of luck.

Peter Anderson · Answer

@Lindsay Iordache

Lindsay - your house will likely cash flow in Stamford with 20% equity. And you’re right, the additional mortgage pay down over long term will make it worth it. I am holding a few in Springdale/Glenbrook and buying more with same criteria.

I think your goal to rent it out and buy another fixer upper is smart. Let me know if you want to strategize, I can help.

Peter

Whitney Hutten · Answer

@Lindsay Iordache Jayesen's Q's were spot on.  I'd back it up a couple of steps.  WHY do you want to pursue real estate investing?  What pain do you have, and what do you want from it long term?  Knowing both ends of the spectrum will be super powerful.  Once you have clarity on what it is you want long term (what you are running towards), you can pick a strategy that best aligns with that long term goal.  All to often I see investors whose immediate is a soul-sucking job, and long term is time back with family and friends... and guess what... the pick a strategy (say flipping) that just become another JOB to them.  Getting that alignment early, and knowing how you will work through the stages of investing at a high level will accelerate your growth!  PM me if you have Qs.

Jaysen Medhurst · Answer

I think you could benefit from getting a bit more specific with your goals and the steps to get there, @Lindsay Iordache.

• "Own your home outright." Why? Is that "financial freedom" to you? Does it fit into larger "whys" for you? (E.g. no mortgage would allow you to quit your job and be a stay-at-home mom or start a small business.) Is it a matter of security? I ask because sitting on $500k+ of equity with no return (other than appreciation, which is speculative) probably isn't the best long-term financial decision. What's your timeline to do this? How many homes to you think it would take to achieve a paid-off home?
• "Invest in a BRRRR property." Again, how does this fit into your larger strategy and "why." Are you trying to achieve a certain amount of rental income each month? What's that number? How did you get there?

Feel free to PM me if you want to dive deeper into any of these.

Lindsay Iordache · Answer

Thank you @Jaysen Medhurst for your response! I appreciate the feedback, you've given me a lot to think about. You're right, our home wouldn't make a good rental. I was thinking it would be a good idea to rent it to cover most of the expenses of owning the property and continue to build equity on it while allowing us to make a lateral move into a similar home. But that might not be the best option.

I have two short term goals for the next year: 1. I want to move into a similarly priced fixer-upper that we can live in and build equity by making improvements over time, and continue that process every few years until we can own our home outright (or find a fixer-upper duplex to move into and grow from there). And 2. I want to try to invest in a property using the BRRRR method. For this part of my goal, we are looking in the Pittsburgh market because it looks like there is some opportunity there in our price point, and because I have a brother in Pittsburgh who could help oversee the project.

Your questions might very well have been rhetorical, but if you have any additional input I would love to hear it! Plus it's always good to put one's goals out there.

Thanks again!

Jaysen Medhurst · Answer

Hi, @Lindsay Iordache. I live right next door in Greenwich. Always great to meet other local folks on BP. As far as your questions go:

• Look through all of your loan documents and then give your closing attorney a call.
• The first thing you need to do is a thorough and realistic rental analysis of your home to determine if it will make a good rental. Spoiler: it won't. In our market, the rent-to-FMV is way out of whack. It will be almost impossible to cash flow. If you do, it's only with a ton of equity. The problem there is that you'll be getting a horrible Return on Equity (ROE).

That leaves the question of how do you use your equity to help finance your REI goals? I think that HELOCs can be very powerful. The fees are low, you can sometimes get up to 100% total LTV, and you only pay interest on the money that's actually being used.

What are your REI goals, Lindsay? What kind of strategy do you want to pursue? Where are you in your REI education?