How much equity?

Question

Hi all,

I have at least 200K equity in my SFH. I'm interested in buying and holding a condo/townhome in the "interest" of a nice cash flow and of course appreciation. I'm wondering if using ALL of my equity and buying a condo outright (if possible) is the most advantageous way of going about this.

Thanks!!

Chris DeChiara · Answer

Thanks guys. So is a cash out refi not a good idea? I was led to believe it would be in order to use as much equity as possible for a buy and hold condo/th.

Upen Patel · Answer

If it appraises at $500K, @ 80% LTV you can get a loan for $400K. After paying of the currently owe $310K, you will be left with $90K to buy a condo. This is clearly not enough cash to buy a condo outright here in NoVA. Also, you have a good rate on your primary home. If you can qualify, I would recommend that you get a loan to purchase your investment condo. You will have to put 20% down to do the purchase and get a investment loan. Also, since the loan will be against the condo, you will have a tax advantage which you will not if you take cash out of your primary home to do the purchase.

Hope this helps. Good luck.

Upen Patel

Chris DeChiara · Answer

In terms of the market, this area is up and coming. New schools, subway system, by the airport, new construction nearby. New, trendy cafes and supermarkets, etc etc.

A lot of the condos look like they're going for between 200-300K and are a couple years old. Then there's the brand new construction. The SFH homes are from 500-700K close by.

Probably not as much info as you need, but that's what I know...! Thanks!

George Allen · Answer

Lot of things to consider with that one.  lol.  I don't want to say there is a lot of information there lol.  But there isn't.  I'm careful about condo's depends on where they are and the market.  Your level of experience.  I mean years ago they were hotter than a burner on a stove then the bottom fell out of the market for some reason.

Then there is the rental data for the area.  Do you have an appraisal.  I mean the risk should kind of give you an idea of how much leverage.  Once again I am circling the problem with not a lot of data. Would I do it given what you have described I dunno.  You have a lot of variables there are you going to rinse and repeat.  Best way is to get a nice equity line of credit make your decision from there.  You may want to get two or three of those condo's which you could if it stacks up.  Who knows. You probably more than likely could.  If everything stacks up.  You might want to think about diversification.  ie: some sfr's also

Chris DeChiara · Answer

Thanks Steven! This suggestion was from a friend/mortgage banker. I don't take it as gospel, but that's the first suggestion I've heard since I started looking more serious.

Forgive my ignorance-if I buy a 150K condo outright using my equity, say at 3.4% am I netting everything after insurance, taxes, etc since there's no mortgage payment then? And since my 1st mortgage will be higher as a result, I can pay that with the larger cash flow from the condo rent?

And what do you mean by "leverage the return on the new investment?"

Thanks!

Chris

Steven Bond · Answer

What interest rate would you be paying on the increased leverage to get to 100% on the SFR since many traditional loans will not go that high on a cash out refinance so your terms may actually be higher than the leverage on the condo.  There are two questions I can see that you'd want to be asking.

1.  If stuff hits the fan, what do I want to be protected form or hedged against happening?

2. Overall cost of the transaction is cheapest by doing?

Typically, I advise clients to put down 20-25% to give yourself some cash flow room, built in purchased equity and also to leverage the return on the new investment.  Every market is slightly different though.  I highly recommend you get with a reputable REALTOR and/or investor as well as a lender with a solid reputation of efficient and consistent results in your local market.  Good luck and welcome to the world of investing.