How to buy a new primary residence and rent out our current house

4 Replies

I've found alot of good research on here about my pending scenario, but nothing quite fits exactly...

Our situation: My wife and I purchased a brand new house (4bd/2.5br) three years ago with an FHA loan. We are right at 30K in equity and starting the HELOC process to tap into the equity (We've been pre-approved, just awaiting fresh appraisal).

The current 3.375% mortgage is only in my name, but of course the deed is in both of our names. Monthly notes are around $965 and we'll be paying PMI for about 10 more months. Once PMI drops, we'll save about $140 month. Fair market rent in the area is $1200 but you can easily demand more based on nearby schools, neighborhood amenities, etc.

We want to move into a new house in the next couple of months for a pending household size increase. Recently entering into the REI arena, I figured this would be an excellent opportunity to get some cash flow.

We're considering using the HELOC to pay the down payment on a new house using an FHA, USDA(If eligible), or a Conventional 97 loan in my wife's name. I'm accounting for about a 5 month holding cost until our first qualified renter shows up. Other houses in the neighborhood have rented fairly quickly and for long periods of time (I was the HOA Treasurer of two years).

My questions:

1.Rent or Cash out?

2. FHA loans require owner-occupancy or enter the mysterious DOS clause.. Being married, I'm sure you see the dilemma their.. How do we overcome this?

3. Can we use HELOC funding for a down payment? Most loan apps ask where the down payment is coming from..

Hopefully this enough details for you all to provide solid advise. If not, fire away!

Thanks in advance BP family.

1. It depends. Do you expect the property you are moving out cash flow? What phase is the city you live in the real estate cycle? Do you feel comfortable managing the property? If it cash flows and you are comfortable with renting, i would say rent it. If you are in a seller's market, maybe cash out and hold the cash for other investments or buy discounted properties when it becomes a buyer cycle. You might consider doing a 1031 real estate exchange and roll the profits from first home into next one tax free.

2. Ethically, whoever buys the house has to live there. Also, beware that some banks are particular about what property you buy next if you already own one. For example, if you own a single family and want to buy a four plex with FHA, some banks would no allow that. Going from let's say a single to another single is probably ok. I ran into this problem this year.

3. I recommend asking the bank whether this would be cause for concern. Some banks are ok with it.

With the DP they will take the HELOC payment into account for your debt to income scoring.

Originally posted by @Alberto De jesus :

1. It depends. Do you expect the property you are moving out cash flow? What phase is the city you live in the real estate cycle? Do you feel comfortable managing the property? If it cash flows and you are comfortable with renting, i would say rent it. If you are in a seller's market, maybe cash out and hold the cash for other investments or buy discounted properties when it becomes a buyer cycle. You might consider doing a 1031 real estate exchange and roll the profits from first home into next one tax free.

2. Ethically, whoever buys the house has to live there. Also, beware that some banks are particular about what property you buy next if you already own one. For example, if you own a single family and want to buy a four plex with FHA, some banks would no allow that. Going from let's say a single to another single is probably ok. I ran into this problem this year.

3. I recommend asking the bank whether this would be cause for concern. Some banks are ok with it.

 Thanks for the quick response. I'm not familiar with a 1031 real estate exchange. Does that mean I have to sell? A local realtor I've been working with for investments mentioned that we are in a sellers market in our city. Alot of new developments are springing up in every wooded area and vacant farm!

We're looking into another SFH.

If land to build on is becoming rare and the job market is growing, your original house might appreciate more. Just another reason to consider holding.

To do a 1031, you would have to sell it. The big benefit is that you would put the profits into the new property without paying taxes. The downside is it's time sensitive.

Here are some articles:

http://www.biggerpockets.com/renewsblog/2014/08/21...

http://www.biggerpockets.com/renewsblog/2009/09/07...

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