My starter strategy

[Nick B.]

I've been browsing BP for a couple of weeks now and have been pleasantly surprised by the quality of the community here. Thanks for making this place so valuable.

I am looking for advice. My wife and I own a home, purchased in early 2011 for $240k, and we currently have $220k left on the mortgage. It was a short sale, and we purchased at the very bottom of the market. Current interest rate is 4.8%, with a total monthly payment of $1850.

The house has appreciated to $315k. This is a realistic appraisal as we have closely been monitoring comparable Sold homes in our neighborhood. I am not exaggerating the value of our home.

We do not have children. Our combined income is $130k. 720 credit score. We have very little cash at this time, though our parents have offered to do a HELOC on their home that would allow us $130k.

Our goal is to sell our home for around $315k, which I think would net us roughly $80k. We would sell it ourselves. My wife just recently got her real-estate license. We would then rent a home. Then we would look for investment properties which we would buy, refurb, hold, and rent. We would use the $80k from our home sale and potentially the $130k from parents HELOC.

Please let me know what you think. I value your input. Thank you,
Nick

[David Beard]

I would also not be so anxious to sell, if you like the neighborhood. With rates so low, it's just a fantastic time to lock in your home for the mid to long term. You DO need to refinance out of the FHA loan. With the jump in home value, you now could get an 80% LTV loan and get rid of the MIP. You could potentially get a $250K loan, put $25-30K in your pocket, and lower your PITI to $1,500 or less.

I would pay the minimum on the student loan debt, and do everything you can budget wise to free up funds for investing.

Couple of points on your buy-rehab-rent-refi plan:

* If you use funding from your parents, which is perfectly reasonable, it is critical to record a mortgage in their favor, along with executing a note. The mortgage is critical so that when you go to refinance the new property, it will be a no-cash-out refinance, not a cash-out refinance. The former can be obtained in as little as 4-6 mths after you purchase the property, the latter might take a year. And cash-out refinances can't even be done once you have 4 financed properties ( conventional loans, that is).
* Make sure that the mortgage and borrowing is for a sufficient amount for both the purchase+rehab.
* Make sure that you have your "take-out" lender lined up and briefed on your plans, and that they have indicated they can do the refinance as you expect. Some lenders do not want do to a no-cash-out refinance when the current mortgagee is an individual (particularly a relative). They might force the loan to be treated as a cash-out refinance. It may be necessary for your parents to set up an LLC and lend from the LLC. You may need to talk to several lenders to find one that will permit this to be treated as a no-cash-out refinance. If you don't clarify all this with your take-out lender up front, you may be stuck in the property for a year before you can get your funds out. Make sure you pay your folks a competitive rate of 6-7%.
* Lenders do not want to give you credit in your Debt-to-Income ratio for rental income until you have two years of landlording experience. They'll force you to carry the PITI in your debt number. So you will need to monitor your DTI ratio closely until you have the two years experience. If you buy something in 2013, you will officially have two years when you file your 2014 taxes in early 2015.