Buy second house, rent out first house? Advice needed!

14 Replies

Hi all, this is my first post since signing up recently, yay!

So, we're expecting later this year with our first and would like to move closer to our parents.

We currently own a condo ($240k balance on loan) and believe we can rent it out to cover nearly all of PITI + HOA. Unfortunately, selling the unit is not an option as it is underwater.

In turn, we could rent or buy a modest SFR for around $325-350k (with 20% down). Our household income is between $160k - $175k annually and our credit is good. I haven't talked to a mortgage broker yet, but was hoping to get tips or advice on whether this is a good idea before I do. Thanks!

When you talk to your mortgage broker, you will likely find that these days, even if you rent it out, any rental income for that property will not count towards any new home purchase and your whole PITI + HOA payment will count against you for at least 2 years, so you'd have to qualify for both mortgage payments, new home and old. There are a lot of previous posts here on ratios that make a good rental property as "nearly all of PITI + HOA" doesn't cover vacancy, maintenance, or repair costs. My opinion is that this is only a good idea if a short sale is not on the table for some reason. If a short sale doesn't work for you, could you refinance the house to make the numbers work better for you? They usually won't allow a refi it if it's been for sale recently or you plan to sell or rent soon, so you'd have to decide on a refi before you decide to sell or rent it out. If you could get the payments down drastically so rent covers PITI, HOA and most of the expenses, then it might be easier to refinance now, then make the decision to rent it out and move closer to your parents in a year or so.

You may want to contact your bank and find out about HARP , it's a govt program that if I recall correctly can eliminate the upside down amount on the mortgage . You don't have to be late or delinquent either if I recall.

I may be wrong but I know there is a program out there that I still keep hearing about that does this. Good luck

Thanks guys - I should probably mention a few things:

Our intention is to eventually sell the condo once the market recovers over the next few years. We looked at refinancing thru HARP, while our mortgage is owned by Freddie/Fannie, we bought a few months after the cutoff date, doh! If we wanted to refi, we would have to cover a difference of around $30k between the likely appraised value vs loan.

With that said, my thought process is that renting out the place while we wait for the market to recover would cost us about $200/mo (essentially insurance + maintenance). Not ideal, but not unbearable...not sure if that warrants a short sale or not. My main issue with a short sale is related to not wanting to damage our credit when we will likely try to buy-up within the next 10 years.

Lastly, we're looking at the SFR ($325k target) as something we would live in for five years before renting out as a long term buy and hold - we think we can secure a good 15 year loan that aligns with rental rates in the area. And by the time we're 50, we would own it free and clear (and before the kid goes off to $$$ college).

you don't mention how much principal paydown you have each month. few here on BP pay attention to that.

you have a ton of income so that's not an issue with floating the payments. i'm assuming you have a decent amount of reserves.

i rented out my primary last june, though those on BP said the numbers don't work. i have 17 years left on the loan so i had a lot of principal paydown each month. i run slightly into my pocket to pay the repairs/maintenance each month.

the kicker was the new house we bought, our quality of life went thru the roof...less commute, triple the space, new home. and an exact house 5 doors down appaised $20k more than our purchase price 6 months later.

Originally posted by Scott W.:
you don't mention how much principal paydown you have each month. few here on BP pay attention to that.

you have a ton of income so that's not an issue with floating the payments. i'm assuming you have a decent amount of reserves.

i rented out my primary last june, though those on BP said the numbers don't work. i have 17 years left on the loan so i had a lot of principal paydown each month. i run slightly into my pocket to pay the repairs/maintenance each month.

the kicker was the new house we bought, our quality of life went thru the roof...less commute, triple the space, new home. and an exact house 5 doors down appaised $20k more than our purchase price 6 months later.

For the condo, only about 25% goes toward principal paydown. Our reserves are ok...to be conservative, we plan to wait on purchasing until we secure a one-year rental agreement for the condo.

Wow, triple the space and it's new? Man, I know our income is good compared to national averages and such, but living in California, you can hardly notice it! =(

You would make a better return on you money if you found a good deal on the second house and rented that out rather than the condo. You will likely have much higher rehab costs to put the condo on the market for resale if you start renting it out, plus it will cost you money every month if it only breaks even not counting vacany and maintenance.

Originally posted by Brian Hoyt:
You would make a better return on you money if you found a good deal on the second house and rented that out rather than the condo. You will likely have much higher rehab costs to put the condo on the market for resale if you start renting it out, plus it will cost you money every month if it only breaks even not counting vacany and maintenance.

I agree - but making a better return is not our first priority here. We want to be closer to family first.

Also, the condo is unlikely to be sold right now...so renting it out seems to be the best option even if we take on some incremental expense.

given the time involved in finding/buying/rehabbing (if applicable) a new place, I don't believe your idea of finding renters before buying would be plausible. It would take min 60 days on a flawless closing with financing from time of contract. Very few renters even sign a rental contract a month out, let alone 2-3 months if there are unforseen delays in your closing.... You might have to take that leap first if you understand exactly what rental price you can set for your current place...

Originally posted by Jeff Bridges:
given the time involved in finding/buying/rehabbing (if applicable) a new place, I don't believe your idea of finding renters before buying would be plausible. It would take min 60 days on a flawless closing with financing from time of contract. Very few renters even sign a rental contract a month out, let alone 2-3 months if there are unforseen delays in your closing.... You might have to take that leap first if you understand exactly what rental price you can set for your current place...

Great point - we have friends who moved into a cheap month-to-month apt for a few months right after they sold their townhome. I imagine we would do that or stay with our parents (if they'll have us) during that 2-3 month period.

What about a local bank or a credit union?
While a bank may not be able to count that rental
income for a conventional mortgage, a local bank
or credit union may very well have no problem doing so.

Quite honestly, with that income, you should have
no problem getting a local bank to lend on a 300k house
especially if you're first house's rental payments will
cover your PITI.

Although even a smaller bank will ding you a little on
the rental income as they will only count 75% of it.
But you would be so far ahead of the dti reqs, I don't
see any reason why you wouldn't be able to qualify.

Given this plan, be sure to calculate the cost of moving your entire family's belongings twice with the alternative of moving your family once, and instead paying an additional months PITI out of pocket on a vacant original property. This not only might reduce cost, but also reduces family pain of moving, burden on other family and you'll have the luxury of moving in a less hectic manner and over a couple of weekends perhaps. thinking out loud, you could get something under contract, close in 60 days, then have tenants move in 2 weeks or 1 month later depending on how quick you can make things happen. After all, you'd be incuring rental costs anyway even if you were able to rent it right away. just calculate each of the options first. one might be less painful for not much more out of pocket.

Great point - we have friends who moved into a cheap month-to-month apt for a few months right after they sold their townhome. I imagine we would do that or stay with our parents (if they'll have us) during that 2-3 month period.

@Jeff Bridges you commented how difficult it would be to find a renter & move out with minimal vacancy. in my case, this was not true. i moved out june 1st & had a renter in june 2nd.

My answer is find some professionals to do it for you and it will change your life instead of fighting the fight alone check this video out. They have team in place that will help you do everything you can think of and more it is amazing. Link Below

http://www.strongbrook.info/RAsignup/page1.aspx?ID=propertyinvestorsinc

If you have any questions do not hesitate to call or email. Best of luck with all your future endeavors.

Isaac Palmquist & Ann Whigham
Property Investors, Inc.
Denver, CO

[email protected]
303-481-8811 home office
720-261-5123 Ann's cell
720-933-4269 Isaac's cell
888-359-4504 fax

Originally posted by Andy Yoon:
...to be conservative, we plan to wait on purchasing until we secure a one-year rental agreement for the condo.
=(

@Scott W. You raise a good point but I think we both agree that buying a new place and then finding a tenant for the original property seems like a better plan instead of his above proposal. If he gets someone to move in the day after he moves out, thats great! But given that Andy is new to rental marketing and the whole landlording thing and we dont know how hot his rental market is in his neighborhood , I'd plan for it taking a month to get tenants in there. If he can make it happen sooner, thats a bonus!:)

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here