Don’t know what to do next

9 Replies

Ok so I feel kind of lost. My wife and I live in Raleigh, NC and own a townhome. With about 60,000 in equity. It would make a great rental for a would be first time landlord. We would probably make 250 a month on it. We want to buy another townhome to do this process all over again. But don’t have 20% down payments and would have PMI. Is leaving the 60,000 in equity on the first home a bad idea? Or is it ok to leave it there and let it keep growing? Are some of you accepting of paying PMI on a property?

I am not too keen on paying PMI. That is extra money that I could have invested else where. In addition, I feel like if I have to pay PMI, I am not ready to purchase another property. This is just my belief that I go by. I like to have some money saved up aside from down payment just in case something happens in your life (laid off, accidents, and other emergencies), so I believe that it is much more safer to have at least 20-30% down payment when purchasing a home or investment property. It shows that you are more ready to purchase and is able to handle the debt load.

If you cannot find a tenant in property one for awhile, you have to factor in the vacancies cost. If there is a big emergency repairs or something that has happen that would also have an impact on your cash flow.

I would wait until you have at least 20 % down payment before purchasing another property, unless your main day job can help cushion the expense cost (vacancy, repairs, taxes, insurance etc). When you crunch in your numbers, always think of the worst case scenarios possible. If the numbers still seems somewhat do-able/reasonable then go for it.

However, I have seen people doing it with below 20% down and buying investment properties after properties (I think it is pretty risky move). Some did good but few had bad luck with tenants/vacancy/ or other emergency that hindered with mortgage payments and had their properties go into short sale or foreclosure even with a decent paying full time job. I think it boils down to how well you manage and handle your properties and your money. 

But I personally will not purchase a property that requires PMI into the calculation.

Hi @Aaron Proctor ,

Question #1 is: Will your HOA allow renters? The answer isn't always yes.

Here are some options for you:

  1. Do a cash-out refinance on your townhome, use that money as down-payment on a new home. however, if you have an awesome low interest rate you would lose it. 
  2. Capitalize on the equity that has been built by pulling out a HELOC on your townhouse . Then utilize the HELOC to help fund the down payment on your second (new) property. Of course there are risks associated with that such as increasing your debt, but most HELOC payments are a minimum of 1% of the outstanding balance. I can recommend a couple credit unions in NC that would be good to use, one of which doesn't charge closing costs.
  3. Sell the townhouse (from a tax perspective). You can unlock those capital gains tax free with no stress, worry, or headaches associated with owning a rental property. Though, you only need to live in the property 2 of the last 5 years to receive the capital gains tax-free. So, in your situation, you could rent the property out to see if you like being a landlord. Then you would have 3 years to sell the property without having to pay any capital gains tax. 

I found the HELOC looks like the best option because refinancing away from a low interest rate adds to how much you pay the bank when you refinance. Look at how much more you would pay on principal & interest by refinancing and you will think more about selling or doing a HELOC to keep your loan with low principal and interest.

Hello Aaron!  I would suggest that you sell your liability as soon as you can, yes I said  liability, It is called an asset to brainwash you to think it is but when you add the property tax and maintenance, you'll see what I mean. House values have even only kept up with yearly inflation over the last 100 years.  I live just outside of Dallas, Texas, and after I thought about it it is true that you're lucky if you break even.    When you realize you have spent what it's is worth today, you will realize when you add in property tax and maintenance you break even if you are lucky. 

I paid just over $100,000 on it originally and it's worth about $250,000 now but when you add in what I've spent on property tax and maintenance I just break even after about 34 years.  Owning a home is usually a bad investment plain and simple.  You might be saving the money between a rental unit and a home purchase debt service.   I joined biggerpockets about 5 years and since then I have learned many things.  Being bedridden has given me much of that time educating myself, 7 days per week.

The things you have been taught in grade school and told by your family is not true anymore.  You should be learning the legal way to raise money and forming Partnerships and buying apartment complexes under your control.  The more units you own, the better you'll be.  You might have noticed that people that have been successful with rental units in  houses have to own about 20 or 30 of them just to cover their monthly bills, then they might get some of the profit when they own 30 or 40 all at different addresses.

With apartment complexes you might just have one address where you have many units.  Owning a single digit of house units are not worth the time you have to spend on them or turn them them over and they usually cost you twice as much as you have thought or saved for.  In today's economy it's better to either own apartment complexes (which don't require any experience) , Fix and Flips, or Quick Flips.

I do believe that real estate property ownership is a game of quantities and how many offers you make will effect your success.  I usually know what I'm talking about because I have been in construction management for about 30 years as well as having a real estate broker license for about 30 years and having a business college degree with honors that emphasized real estate.  So I've been around a block or two.

I say what I say as an attempt to let you know more about this world and I have not meant for you to take this advice personally. Not mentioning your age can effect your answers. I had to pay PMI until my property got down to 80% of my value or the loan balance. One other way to make money is to offer your home as a Lease Option to somebody that has been turned down by a Bank and not knowing their are alternatives and act like they can pay their bills.

A HOA can be very risky so ask about them before you buy (from future neighbors) another one of thattype of unit and know their requirements or possible special assessments for capital expenditures and know if that property is close to making one. Renting will usually allow you to save more money than buying.

Do not believe all that you are told, especially from those that have not done what they are talking about.  Your parents may love you but they did grow up at a different time and are just telling you what they learned when growing up and most people do not know what they are talking about and that today things are alot different than they use to be and that the times has changed.

Good luck to you!

I would choose to sell or do the heloc if you really want to be a landlord. $250 over the monthly expenses will quickly be eaten up in repairs and misc rental expenses. If you feel the market will be a great increase, keep the home. 

If you have 1 tree and it grows you have some shade. If you can plant a second and third tree you have a grove. Add a 5th or 6th tree you end up with a park and many many trees lead to a forest. I like planting trees rather than cutting down my trees as they are maturing. Unless of course I find better soil with better conditions where my trees will grow faster and stay healthier or somebody wants to sell me trees that they have planted for a discount. (Please forgive my tree analogy ... I'm a true Oregonian at heart)

I just want to thank everyone for their opinions and thoughts. We ended up withdrawing an offer because we want to be more secure before doing any of this. Next time I’m looking at homes I’ll have 20 percent down and a lot of extra cash on hand. So now we will wait. Maybe even pay our mortgage off early.