Current House... rental or sale?

Question

Hello and Happy Wednesday!

Loving BP and the knowledge gained as we enter into the world of investing. We currently own a house as of 17 years, refinanced once, in which mortgage payments are quite high.

1. Should we consider buying another house (possible flip) residing there while rehabbing and renting current house?

2. Sale current house, use cash for investing/ and rent. (bad, I think),

3. Stay, use heloc to invest in rental properties.

Considering the area in which we live, #3 might be the best option. Seeking advice on how to start investing with little cash flow.

Thanks in advance!       Katy

Katy Oh · Answer

Hi Michael,

Right on target as far as rental market in this area. Ideal location for rental, decent public schools, cul-de-sac, family oriented, community, teacher rental for sure (3 schools in walking distance)

Thanks!

Katy Oh · Answer

Thank you Gerald; awesome advise!

My goals are to invest, move, change and grow!

I am comfortable here, obviously 17 years, but do not love it and could move easily. Semi concerned that we stayed in the house too long.  But so thankful we all have the choice to make our lives better.

Current house needs some paint, miner updates, mostly cosmetic. We used some equity line of credit to update kitchen, master bath, and partial flooring. Paid cash for hardwood flooring.  Renting now, would give a minimal cash flow after paying mortgage and expenses, (let's see, I learned and read about that acronym ...hmm! )  around 200$ monthly.

Still learning, researching, and planning first steps of investing.

It will happen!

Thanks for your insight.

Katy

Michael Lee · Answer

Hello and welcome to BP!  I have been struggling witth that same thing recently.  It all depends on how much money you allready have and if either one of you is employed.  One or two probable differences is our age (the 50's) and how much equity you have and if you have any money in the bank.  I think.that it being your first rental property has many positive things and you can do the sell and use that money for investing.  What kind of demand for rentals do you have in your area and do you have any amenities?  What kind of repairs do you need?  You might have your first rental property in front of you.  That might not be what you are after.  Good luck to both of you!

Gerald Demers · Answer

Hello @Katy Oh, I would start with "do you love where you are living or would you move if you had the chance?

Why are your mortgage payments so high?  For us, our house had a 15 year mortgage, payments are higher which we wanted as we wanted to pay it down.  The challenge is that it messes up your debt to income ratios.  So, we refinanced at a lower rate, 30 year fixed.  We kept our payments the same so it will still be gone in 11 years now, but our debt to income looks better so we can now qualify for another mortgage.  Also, if we find another house and decide we want to live there now, we can rent out our current house, make the required payments of the 30 year and easily cash flow the property.  So, why are your payments so high?  If you rent the house now leaving the financing in place, will it cash flow?

Option 1 implies the house where you live is not rent ready.  So, you are considering buying a new home, moving there, and then rehabbing your current home to rent, correct?  If yes, you would have a high mortgage payment on a property that you are neither benefiting from use or generating income.  That high mortgage payment can be an albatross that could make you a motivated seller and that's not good.

Option 3, considering the area we live in, might be best to stay.  Seems like it's a good area.

So, start with life in a perfect world.  If you had a choice (and you do), would you stay?  If you want to stay, can you afford the high mortgage payment AND second payment on the HELOC?

If you want to move, I would refinance your current home while it's your principal residence to take the pressure off (you can still make the same payment you make now but know if rents soften or you have a major expense, you can lower your payment to just what is required.  Then, while living there, I would get it rent ready.  Then find your next home with conventional financing, move there and rent your current residence out.  Talk to a CPA that knows real estate to make sure you are mitigating taxes and maximizing benefits.

Finally, you need cash to buy properties, but it does not have to be your own.  If you stay where you are, whether you pull cash out or not, start talking to people about partnering with you on some investments.  Do not expect a private lender to lend to you on a property you plan to live in.

Hope this helps,

Gerald Demers