My name is Ryan, and I just joined BP this week. I want to get into REI and I'm looking for some help figuring out whether/how to pull off a house hack.
- We currently own a 3bd/2ba split level, appraised around $168K two years ago.
- We have a 15 yr mortgage at 2.75% and owe $118K. P&I payment is $947, plus $282 to escrow each month ($1229 total).
- We have $30K cash available and two incomes. (But some of that cash is in our "emergency fund", so I don't think we would want to put all of it toward our next home.)
Here's what makes our situation challenging: We have twin sons (3 yrs old) with a severe disability. They have trachs, ventilators, and feeding tubes, and require 24/7 nursing care. A split level is terrible for wheelchairs, so we are looking to build a custom home that accommodates the boys.
If we didn't need to move ourselves, I would start looking for rental property. But our immediate need is a home that works for us. So I'm trying to learn what I need to do to keep our current home and turn it into a rental. Similar properties in our neighborhood rent for $1425, but conservatively, the range is $1100-1350.
My question: How do I leverage our current house? I've been reading about HELOCs and Refinancing, but I'm not sure how to calculate those potential payments so I can figure out cash flow. I want to talk to some local lenders, but I'm not even sure what questions I should be asking. Is it even possible to use a HELOC or cash-out toward a down payment on our next home?
Thanks for sharing your time and knowledge!
I'm curious why you want to convert it into a rental rather than selling it? The only way I can see to make your current house a cash flow positive rental is to do a refi (no cash out) out to a 30 year mortgage while you still live there (so you get owner occ rates).
I'm sorry to hear about the challenges you have with your sons.
As for your situation, the problem with a cash-out refi or a HELOC is that most lenders will only go up to 75-80% loan-to-value (LTV). So using your numbers, if your house is still worth $168k, 80% LTV would be about $134,400. Since you owe $118k that means you could pull out $16,400. At 75% LTV it would be even less. There are some banks out there who will go higher than 80% so you'll just have to call around.
The other problem with a HELOC is that it is going to add to your debt-to-income ratio (DTI) so when you go to purchase your next house they will count that as debt against you since you'd be using the money toward the down payment. This may or may not hurt you depending on how much other debt you have and what your income is.
My advice would be to explore selling your existing home on a contract for deed/seller financing. This would allow you to get a down payment from the new buyer without increasing your debt ratio.
Keep us posted and best of luck!
@Destiny Fargher - Yeah, I should've clarified. If we kept it as a rental, I would want to convert to a 30 year to reduce the mortgage payment. We wouldn't cash flow with the current payment. So is it technically possible to get owner occ rates on this home now and then on the new home we would move into? We don't have any other debt and could make it work with our debt to income ratio.
@Eric Black - I mentioned a seller financing type of scenario to my wife and she asked why that would be preferable to simply selling it outright and walking away with our equity. I wasn't sure what to say. I'm just trying to figure out a way to start building our portfolio, but I'm not set on keeping this one if it's not the best move.
@Ryan Chase There are a few reasons selling with seller financing can be a better option.
1. You save 5-6% in real estate agent commissions. 6% on a $168,000 sale is $10,080. This will then give you more money to have toward your next down payment.
2. Depending on how the deal is structured, how much of a down payment you get and who you sell to you can often receive a monthly payment from the new buyer that is more than what your current payment is, giving you another monthly income stream. It's like a rental but you're not responsible for repairs! If you sell to someone who may not be able to get traditional financing elsewhere due to a foreclosure or short sale, but who otherwise has very good credit then you can often sell the house for slightly over what the market is bearing.
Since you have lived in the house for at least 2 years you don't have to worry about capital gains taxes.
If it's not something you're comfortable with then I would look at Destiny's suggestion of refinancing with a 30-year fixed to see what that does to your payment.
Welcome @Ryan Chase I am by far not an expert on seller financing. You should know that there is a due on sales clause in your mortgage. This simply means that the lender can demand payment in full when the property is sold. Will they is anyone's guess but they may. The post titled The Definitive Guide to Using Seller Financing to Buy Real Estate by Brandon Turner explains it much better. I'm not saying you shouldn't sell using seller financing. I am saying you should have as many of the facts before making a decision.
Thanks for the tip, Neil! I'll look into that.
@Ryan Chase As Neil mentioned there is a due-on-sale clause and you should definitely be aware of this. However, I think if you were to ask all the member of BP who have bought and/or sold a property with seller financing how many of them have had the note called due that the number would be extremely small. If that happened a lot then wholesalers and investors wouldn't use the strategy, but you do need to be aware of it and that the bank could call the note due.
On another topic, I was discussing your situation with my wife who has been in the mortgage industry for years. As Destiny recommended, and I originally agreed with, know that if you are to refinance your current property with a 30-year mortgage with owner-occupant financing, when you sign the deed of trust you will be agreeing that you will occupy the property for at least 12 months. The issue isn't that the lender will find out if move out but that when you go to get financing on your new home the new lender will see this and will most likely say "no" to another owner-occupant loan.
Hope this helps and let me know if you have any questions.
@Eric Black Thank you! You answered the big question that I couldn't figure out how to word. I was wondering how primary residence was measured. So apart from a seller financed deal, my option would be to try to restructure our first home as an investment loan?
I would do a cash out refinance on a 30 year note. That way you can have money in your pocket, a lower payment to increase the cash flow of the rental, and you will still have 25 percent equity in your house.
@Steven Myers The problem is, if he does that with non-owner occupant financing his rate will go up by probably close to 3% which may end up not making his payment go down much. True he'll have a few extra grand in his pocket but not sure it would be of that much benefit after closing costs, etc.
@Ryan Chase Yes, you would have to get non-owner occupant financing for your current property. The down side with that is you'll probably be looking at between 4.5% - 5% interest rate so you'll have to calculate, even if you did a 30 year mortgage, how much that would really affect your monthly payment.
The way the beginning is phrased it sounds like he is still living in the property; therefore, he needs to complete the cash out refi before he moves on to another one.
@Steven Myers You are correct, however if he does a cashout refi with owner occupant financing he won't be able to go get another O.O. loan for at least 12 months. If he gets a non-owner occupant loan his rate is going to go up from what he has now so the cash flow may not be that significant.
Cash-out re-fi to a 30yr. lower payment - save, save, save. Start the building process (finding a builder right now in Sioux Falls is difficult anyway), build. Close on your new house next year at this time and you will have the 12 month requirement met. In the mean time, get your current house ready to rent and get yourself educated on being a landlord?
My above suggestion does not really solve your immediate need though @Ryan Chase. Ill do some more brainstorming
I appreciate all of you sharing your experience and creativity. I'm so glad I came across Bigger Pockets! This gives me a lot more clarity about our situation and some of the potential moves we could make from here.
Taking things in a slightly different direction, do you recommend 30-year mortgages? When we took out our 15-year, our mentality was to get the lower interest rate, increase our principal payments, and pay off our house as quickly as possible. Now that I'm thinking about investing, I'm starting to think differently about leveraging our money. The lower monthly payment of a 30-year would mean more cash available to put toward potential investments. I realize there's not a one-size-fits-all, but I'm curious if that's the way most of you think about your own homes.
If it was me, I would take advantage of a 30 year loan to increase cash flow. Also, if you keep buying more real estate, you will more likely have to go to a portfolio lender. At which point, your only option may be 15 year to 20 year notes. So I think it's best to take the 30 year fixed rate loans while you can get them.
I just purchased a rental property in Sioux Falls, SD using Security National Bank @4% with 20% down (30 yr). In talking to local bankers a couple weeks ago I could do a cash-out refi on my current house at 4.25% - 4.5% on a 30 yr note with (80% LTV).
In regards to rental homes in the SF area seem to get pretty solid rents and do not stay vacant very long if priced competitively.
If you could afford to keep the current loan and try to make a home-equity loan work to help with the building of your future home, you wouldn't have much cash-flow but could accelerate paying off your home vs. 30yr refi. It could be hard if your not handy and you have issues... thankfully my father is a contractor and we partner on our purchases (reducing that risk for me).
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