Good Morning; Good Evening Bigger Pockets family.
San Diego, CA · Member since 2016 · 38 posts · 7 votes
Good Morning; Good Evening Bigger Pockets family.
Most Popular Reply
Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votesI realize you indicate that you do not have the money to invest in San Diego but out of state REI are risky, require a great team, and traditionally do not have the ROI of San Diego REI.
I am a big fan of So Cal investors investing in So Cal. All you need to do is look at 10 fastest appreciating markets for last decade and compare them to the national average. So Cal not only has been the superior investment but it would not even be close compared to the average locale. Of course past performance is not necessarily an indicator of future performance but history indicates long term the property and rent will appreciate. One thing to note about San Diego properties is the supply is finite. The demand seems to be infinite.
So here is my case for San Diego REI:
- Advantages of local including expertise, cost to get to property, able to self-manage if desired (typically ~10%). The family had an out of state duplex hit by 2 hurricanes. Even though we hired contractors, because we were not present we were the property getting the least attention with the slowest work.
- Appreciation: Property and rent appreciation. Do the research. Use your own knowledge of the supply/demand. It really is simple Econ 101. I am not stating that it is certain to appreciate like it has but econ 101 and history tells me that excluding something catastrophic it will continue to appreciate in the long term (there are cycles but long term it has always appreciated).
- Prop 13: My family suffered from this big time on a property on Gulf Shores Alabama. The taxes went up faster than the rents (until the hurricanes). We sold this property even though it was awesome (on the sand).
- I have no problem finding cash flow properties in my chosen area in So Cal. These properties cash flow using a $300/unit per month cap expense and 5% vacancy (our vacancy rate is less than this) and 5% maintenance expense. This cash flow does not include equity gain from making the payment which is in effect additional cash flow that can be obtained with a little effort. They may not cash flow with other parts of the country but the effort is less than out of state REI and so far the appreciation has more than made up for any reduced cash flow (Each property I have owned at least 3 years has gone up at least $100K - I have one property that has been owned only 1.5 years and is probably up $30 to $40K).
- The equity gain for rehabs is larger than many other parts of the country. Nice properties are greatly valued over neglected properties. This implies that I can purchase neglected properties, rehab, and have additional appreciation (more per unit than many other parts of the country).
So my recommendation is you look again at San Diego REI before considering out of state. My family has only sold 2 REIs. One in San Diego county that was used to get all of the equity out to purchase a San Diego (mission beach) beach duplex (so because we needed the cash to purchase another San Diego REI) and a beautiful duplex in Gulf Shores Alabama because it was too difficult for us to own long distance and had turned into a non cash flow property due to increases in taxes and insurance. The San Diego properties cash flow increase almost every year.
Good luck.
29 Replies
- 10yMichael S.Pro MemberBiggerpockets Support · Las Pinas, Metro Manila · Member since 2015 · 7k+ posts · 1k+ votes
Welcome @Terron Winn to Biggerpockets. Feel free to ask around the forums for any questions you have about real estate investing. Good luck on the next deals
- Flipper/Rehabber · Tustin, CA · Member since 2015 · 433 posts · 103 votes10y
Hello @Terron Winn. As you already know, there is plenty to absorb here. Feel free to reach out to me or anyone else for answers to your questions. I currently flip homes mainly in LA and Orange Counties. I think looking out of your area isn't a bad idea, but I think you should also know that you can always use a hard or private money lender to help finance your deals in your area or elsewhere. My wife and I originally thought we wouldn't be able to do our first flip until years down the line, but then we got introduced to the term "hard money lender" and realized that it was possible to use their money to make money. Sure enough, we went that route, and we're still doing flips today. It's been a little over a year, but we're having a blast.
- 10yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
I realize you indicate that you do not have the money to invest in San Diego but out of state REI are risky, require a great team, and traditionally do not have the ROI of San Diego REI.
I am a big fan of So Cal investors investing in So Cal. All you need to do is look at 10 fastest appreciating markets for last decade and compare them to the national average. So Cal not only has been the superior investment but it would not even be close compared to the average locale. Of course past performance is not necessarily an indicator of future performance but history indicates long term the property and rent will appreciate. One thing to note about San Diego properties is the supply is finite. The demand seems to be infinite.
So here is my case for San Diego REI:
- Advantages of local including expertise, cost to get to property, able to self-manage if desired (typically ~10%). The family had an out of state duplex hit by 2 hurricanes. Even though we hired contractors, because we were not present we were the property getting the least attention with the slowest work.
- Appreciation: Property and rent appreciation. Do the research. Use your own knowledge of the supply/demand. It really is simple Econ 101. I am not stating that it is certain to appreciate like it has but econ 101 and history tells me that excluding something catastrophic it will continue to appreciate in the long term (there are cycles but long term it has always appreciated).- Prop 13: My family suffered from this big time on a property on Gulf Shores Alabama. The taxes went up faster than the rents (until the hurricanes). We sold this property even though it was awesome (on the sand).
- I have no problem finding cash flow properties in my chosen area in So Cal. These properties cash flow using a $300/unit per month cap expense and 5% vacancy (our vacancy rate is less than this) and 5% maintenance expense. This cash flow does not include equity gain from making the payment which is in effect additional cash flow that can be obtained with a little effort. They may not cash flow with other parts of the country but the effort is less than out of state REI and so far the appreciation has more than made up for any reduced cash flow (Each property I have owned at least 3 years has gone up at least $100K - I have one property that has been owned only 1.5 years and is probably up $30 to $40K).
- The equity gain for rehabs is larger than many other parts of the country. Nice properties are greatly valued over neglected properties. This implies that I can purchase neglected properties, rehab, and have additional appreciation (more per unit than many other parts of the country).So my recommendation is you look again at San Diego REI before considering out of state. My family has only sold 2 REIs. One in San Diego county that was used to get all of the equity out to purchase a San Diego (mission beach) beach duplex (so because we needed the cash to purchase another San Diego REI) and a beautiful duplex in Gulf Shores Alabama because it was too difficult for us to own long distance and had turned into a non cash flow property due to increases in taxes and insurance. The San Diego properties cash flow increase almost every year.
Good luck.
- San Diego, CA · Member since 2016 · 38 posts · 7 votes10y
Hello
Thank you for the response I received from you . Its truly appreciated and I feel welcomed as you two took the time out to write me.
I understand that it can be more risky by investing out of state but it makes financial sense for me in my opinion. To start off, I was really fortunate to purchase a home in 2011 for 209k. I was only able to afford just about that much due to my DTI ratio. 2016 I will only be able to pull off a loan amount of about 300k and that is not saying much for a home here in California. However, my home is now around 385K and I only owe 180K. Now I have about 200k in equity and I don't know how to start using that to generate more income. I have a few scenarios that I have been thinking about and I would like to share them with you to see if I may be on to something.
1. Refi my first house to go conventional and rent it out for about 2000-2100 per month. Currently I am paying 1430 (w/compound account) with FHA but after dropping off PMI and getting a lower mortgage rate I estimate it to be somewhere about 150 per month lesstherefore profiting about 600-700 per month. ( I live in a community and other homes rented for 2K (and they are smaller in size). Once that is done then I would buy myself a new home in San Diego California if DTI would allow me to.
2. Second option would be to Stay in the house that I am in and take out some or all or most of the equity and invest out of my backyard by purchasing and holding not really flipping because I am still a newbie and I know there are major risk in doing that especially if you are not present to view the progress. (I am no stranger to risk, I play penny stocks and they have been not doing so well. Some time ago, I even bought my x wife a new car that was she totaled the following month!). I have been looking into a company by the name of investibility.com and they actually have homes that are “turnkey” with tenants, and property managers already in place and you would receiving cash flow at purchase. Yet, in my opinion the homes are a little over market price but I can see why since everything is already in place for you. The yearly cash flow, Net yield, Cash on cash and the gross yield is already estimated for you. I have seen some that I would be able to buy using my equity from my home here in San Diego.
3. Third option would be to sell the house take out the 200K and put it towards the new house in San Diego but I would be losing a property and I really don’t want to do that. I have Kids that I want to build a portfolio that my kids can take over when they are older.
Again, I would love to keep my investments here in San Diego and that will be my first endeavor but if it doesn't work out I will have to look elsewhere. With the way the market is now do you still think San Diego has more room to grow? I know the equity won’t grow as aggressive as it did a few years back but do you thinkI can grow still?
Sorry for the Novel
- Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes10y
Originally posted by @Terron Winn:
Hello all,
My name is Terron and i have a background In Business Management with little to no experience in Real Estate investing.
Currently I am living in my home that I have purchased in 2011 and now it has accumulated about 200K in equity but I do not know what to do with it. I would love to be able to buy and hold or flip a house; however, the county that I live in is really expensive and my income from my job wouldn't allow me to purchase another home in San Diego at the market prices they are at now. My thoughts are to look into another state for a buy and hold or a flip and eventually work my way back to being able to buy in my own backyard eventually.
What I hope to gain from being a part of the bigger pockets family is knowledge and to be able to meet some great like minded individuals.
Hello Terron,
Looking at other markets is a great way to invest when you live in CA. I have heard it many times from investors in CA that the prices are just too high to get a good ROI. Many look into markets in the Midwest, where housing is more affordable. Make sure you find a good managment company to work with, or turnkey provider. It will be difficult to managament it on your own while living so far away, that is just my opinion.
Please let me know if you have any questions.
- 10yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Why are you still paying PMI? Once your equity has surpassed 20% you typically are able to drop the PMI. Contact your lender as soon as you can to confirm but every loan I have had only requires PMI until 20% equity. On the positive, your post is probably going to save you some money. On the negative you likely have been paying PMI for quite a while unnecessarily.
Next, a refinance at favorable terms likely will only let you refinance at a 75% loan to value (sometimes you can get 80% LTV but 75% is much more common). This implies you will get ~$100K. This would be a great down payment on a San Diego property assuming you can get financing. Because it would be a rental property the expected rent will be used in any loan calculation and you may qualify for more than you think.
You do not state if you like you home and its location but one thing to consider is that you are paying property taxes on a prop 13 protected asset. For tax purposes you may be paying on a base value of ~$225K rather than the $385K value. Also if you sell and then buy a new home to live in I believe this is unlikely to get you more money for a REI than a refinance because the new purchase will not have rent used in the loan calculations (because you will not be getting rent but will be living there), the payments will be higher because of the increased property taxes and seeing you would be reducing your equity you would once again be stuck with PMI (note ate 75%LTV and 80% LTV there is no need for PMI) and there could be tax consequences if you do plan to buy a less expensive home (do you want to downsize your home?).
Most of these decisions are personal decisions that I cannot make for you. What I can do is provide you some things to consider such as San Diego REI over the out of state you are considering and the advantages of San Diego REI. Such as pointing out the prop 13 advantage your current home has that a new home purchase would not initially have (not until it appreciates). Such as pointing out that you may qualify for a larger loan than you think because loan on rentals take into account the rent for the REI.
Good luck.
- 10yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Tom Ott:
People who say this have not actually looked at the ROI on Southern Ca REI because there are virtually 0 locations in the US that have had a better return than So Cal and San Francisco over the last 5, 15, 20, 30, 40, or 50 years. All you need to do is look at the property appreciation in So Cal for any of those durations and you will realize the size of the return exceeds virtually everywhere especially if the REI were financed. This does not even account for rent appreciation which has had similar appreciation percent as the REI appreciation. REI purchases that I did 3 or 4 years ago have returned over 100% on my investment (typically financed at 75% LTV but some at 80% LTV) and this is the usual where I invest (it is not like I picked exception investment properties - in fact I suspect I did average at best). Good luck finding many areas outside So Cal and San Francisco that can approach those returns.
Hearing it does not make it true in either the cannot get good ROI or can get good ROI on So Cal purchases. So I invite you to look up the property appreciation for any of the years I listed for either San Diego, Orange county, Los Angeles, or San Francisco. Then let me know where I could have had a better ROI (assuming conservative 75% LTV financing on the So Cal REI) with the other location numbers (I know the SoCal numbers). Numbers should include initial cash flow, appreciated cash flow, and REI appreciation. It would be great to find a better REI location.
- San Diego, CA · Member since 2016 · 38 posts · 7 votes10y
I am still paying PMI because according to BOA I still am short like 15K of principle. They are basing the LTV off the original purchase price and not the equity it gained since purchase. I have tried to rid of it plenty of times with no prevail. Remember I am still in a FHA loan and in order for me to rent out the house that i am in now, I would need to refi out of it which I am currently working on now.
I love my home In El Cajon,(3 bed two bath; 1380 sqft) however, I think it's time to upgrade to a bigger place. I currently make about 50K a year and obtaining a new loan at the market prices for the houses I am looking at does not seem obtainable. Median house prices now are about 500K and I am weary about qualifying for that amount, even when the first house is rented out.
I would love to be able to keep my investments close by but can I with my current income? Investing elsewhere would not be as favorable as San Diego but I would still be achieving residual income.
Over all, my goal is to be able to replace my paycheck from work with real estate investments and be "free".
Let's trade places for a second, what would you do being in my situation?
Thank you
- Flipper/Rehabber · Tustin, CA · Member since 2015 · 433 posts · 103 votes10y
@Terron Winn. Definitely a lot of pros for going out of state..better cap rates, better profit...or maybe even the same without needing all the capital you need here. In either case, I think you're on the right path. I just didn't want you to think that you had to go out of state to invest. Good luck!
- 10yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Terron Winn:
I am still paying PMI because according to BOA I still am short like 15K of principle. They are basing the LTV off the original purchase price and not the equity it gained since purchase. I have tried to rid of it plenty of times with no prevail. Remember I am still in a FHA loan and in order for me to rent out the house that i am in now, I would need to refi out of it which I am currently working on now.
...
I'm surprised it is so hard to get rid of the PMI with the equity that you have in you property. I would think an appraisal would suffice. It is a shame to have to pay PMI with such a high equity percentage. Has your lender told you what you need to do in order to not pay the PMI?
You can definitely get out of paying PMI if you refinance to a 80% LTV or lower (most refinances will want a 75% LTV for favorable terms which being lower than 80% has no PMI). You can also pay down the $15K you are short but if you go this route realize when you refinance you are likely to only get 75% of this $15K as cash out (due to the 75% LTV). So $15K in will only result in $11.25K cash out when refinanced at a 75% LTV. Still I would rather pay the $15K than PMI because the PMI payment is lost while the ~$4K of the $15K that you will not be able to pull out upon refinance is still yours in the equity.
Again I hope to provide you things to consider. The correct choice for you has to be made by you.
Good luck.
- San Diego, CA · Member since 2016 · 38 posts · 7 votes10y
@Dan H.; I was too. I guess it varies from Lender to Lender on how and when the PMI gets dropped off. I even visited the HUD website just to verify because I know that I am throwing away money paying this. My lender has told me to either pay the 15K or wait for another 10 years for the principle to reach the ratio.
My thoughts are to refi out of the PMI asap!(which I am currently working on). Paying down the 15K wouldn't be an option because I would still be in a FHA loan right? And being in a FHA loan I would not be able to rent out the property unless I have good reasoning like : growing family, moving out of town, deployment and I am not under any of that.
My first attempt to growing will be to try out San Diego and see what I can be qualified for. It would be much easier and less of a headache to maintain the first property here in California IE: maintenance, Property Management.
It does make since to pay the 15K because it will not be lost.
How do you feel about purchasing a property here in today's market being so "hot"? Are you afraid of the economy turning for the worst like it did in 2008? There is so many videos/articles of how were headed for another collapse.
You are awesome Dan!
- San Diego, CA · Member since 2016 · 38 posts · 7 votes10y
I do not want to go out of state, I would rather invest here in California. I would like to be able to purchase another upgraded primary residence here using the equity from my first place and rent it out.The market here now is so high, I am scared that I wouldn't qualify for a home at the median price range. I just do not know that if the capitol I have would allow me . Investing here will be my first attempt though.
- Flipper/Rehabber · Tustin, CA · Member since 2015 · 433 posts · 103 votes10y
Gotcha!
- 10yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Polar Prutaseranee:
@Terron Winn. Definitely a lot of pros for going out of state..better cap rates, better profit...or maybe even the same without needing all the capital you need here. In either case, I think you're on the right path. I just didn't want you to think that you had to go out of state to invest. Good luck!
Going out of state is not even close to better profit than San Diego. I suggest you look up San Diego property appreciation numbers for 5, 10, 15, 20, 30, 40, or 50 years. Realize the rent appreciation has been similar. Virtually no where in the US has had better profit on REI than San Diego and most of the areas that have had better profit are not out of state (for some of those durations San Francisco, OC, or Los Angeles has had better REI profit). San Diego having better profit than out of state is especially true if the REI was financed.
I see the statement about better ROI or better profit out of California quite a bit on this site and elsewhere but the numbers indicate that there is virtually no where out of California that would have had a better ROI on a financed REI than San Diego. This is verifiable and easily verifiable. If you looked at San Diego REI appreciation over the last 5 years you would realize what sort of returns are average for San Diego on a financed property (average ROI for the 5 years would far exceed 100% if property was purchased at 75% LTV (it likely exceeds 200% when cash flow and principle payment is included and at least for me the majority of cash flow comes from rent appreciation)).
Your not the only one who has made the statement about better ROI or better profit out of California so I suspect you are just spreading what you have heard/seen. I invite you to look at the numbers rather than just repeating what you have seen elsewhere. Here is a site that states San Diego homes in last 5 years has appreciated 38.6% so if you purchased putting down 25% (75% LTV) and had 0 cash flow your return on appreciation alone would be 150%:
https://www.neighborhoodscout.com/ca/san-diego/rates/. Add in cash flow and principle pay down and you can see why I state it is likely that the profit (assuming a purchase was financed) is over 200% for the last 5 years. You are invited to do your own search or use 15 year, 20 years, or any number greater than 20 years all the way back to 1900.
The San Diego appreciation is also why the OP has so much equity.
San Diego has been very profitable for buy and hold RE investors.
- Flipper/Rehabber · Tustin, CA · Member since 2015 · 433 posts · 103 votes10y
Hey @Dan H., I wasn't trying to just repeat what I've heard from the site, I was actually stating what I know other investors do. I'm not familiar with the San Diego market, but I was talking in general out of state versus in state, and I was specifically talking about Southern California. With any market, you have your niches or areas where things are better than the rest. Maybe San Diego is just that hot and I didn't realize it. Wasn't trying to step on toes here, just trying to spread some help and support. I appreciate you chiming in with some better facts. We all have different backgrounds and do our research differently, so good thing you brought your knowledge as well. I do still think that Southern California has a pretty high price point, northern too, but compared to virtually the rest of the nation, it's pretty high. I know people who invest in Chicago and invest less than half of what I do and still get a similar profit in the end. It's all relative.
- 10yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Terron Winn:
..
How do you feel about purchasing a property here in today's market being so "hot"? Are you afraid of the economy turning for the worst like it did in 2008? There is so many videos/articles of how were headed for another collapse.
You are awesome Dan!
San Diego RE has gone in cycles. I do not try to time the cycles. I make sure that I am in a situation to handle the down cycles without needing to sell. So I do not make any claim where San Diego is in the current cycle. What I do claim is that history tells us long term San Diego RE will appreciate. This implies that if you can ride out the down cycles it will come back (always has).
I also know when the market is down people are afraid to invest because it may go lower. When the market is doing well people are afraid to invest because it may be the top of the market. It is easy to find reasons not to invest.
My own feeling (I try not to invest on feelings) is that we are not at the top of the cycle but probably closer to the top than the bottom.
Note most areas in San Diego (but not all) that were purchased 10 years ago have appreciated since purchase. This is something that is easily verified (one minute google search). This means if you purchased shortly before the crash and were not forced to sell you would be fine. I purchased in 1992 near the top of a cycle and that property is worth ~3.5 times what I purchased it for. It initially lost maybe 15%. Here is another item about the 2008 crash: I did not need to lower my rents. Houses were in possession of banks artificially lowering supply. Some people moved in with friends and family slightly lowering demand but the lower supply resulted in virtually no rent depreciation in San Diego (again I am talking averages as there were areas with rent depreciation but not where I owned).
My initial post I indicated I am for San Diego REI. I can make a good case that long term it is very likely to have better ROI than out of state places you would choose to have your REI. I do not really try to make any case (for or against) for the short-term (If I knew I would be very rich). If you are planning a long term buy n hold and can handle a short-term downturn you are likely to do great with San Diego REI even if we are at the top of the cycle.
Good luck
- 10yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Polar Prutaseranee:
Hey @Dan H., I wasn't trying to just repeat what I've heard from the site, I was actually stating what I know other investors do. I'm not familiar with the San Diego market, but I was talking in general out of state versus in state, and I was specifically talking about Southern California. With any market, you have your niches or areas where things are better than the rest. Maybe San Diego is just that hot and I didn't realize it. Wasn't trying to step on toes here, just trying to spread some help and support. I appreciate you chiming in with some better facts. We all have different backgrounds and do our research differently, so good thing you brought your knowledge as well. I do still think that Southern California has a pretty high price point, northern too, but compared to virtually the rest of the nation, it's pretty high. I know people who invest in Chicago and invest less than half of what I do and still get a similar profit in the end. It's all relative.
Virtual all RE in So Cal is in San Diego, OC, and Los Angeles but even if I include Riverside and Inland Empire Southern Cal has had great RE profit. So I know of no county in So Cal with a significant amount of homes (Imperial County and others that far east do not have significant number of homes) that has not done better than almost anywhere out of state. So I invite you to look up the numbers on Riverside County, Inland Empire, OC, LA, or San Diego appreciation for any duration and tell me how many out of state locations you think have had a better ROI (better profit) than the worst of the bunch assuming the So Cal REI was financed.
I take no offense but want to invite people to look at the numbers. They confirm my view that So Cal (all of So Cal) has been very profitable to RE investors.
- West Hills, CA · Member since 2016 · 26 posts · 3 votes10y
@Dan Heuschele
I'm in the LA market and am having a hard time finding a deal. What area are you looking at? Maybe we can talk.
Thanks
- Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes10y
Out of state investing = what wealthy Californians do to lose money.
Do yourself a big flavor and don't mess with the equity in your own home. It'd be a real shame to sacrifice your lifestyle for some out of state garbage.
- Investor · Vacaville, CA · Member since 2016 · 433 posts · 249 votes10y
Originally posted by @Aaron Mazzrillo:
Out of state investing = what wealthy Californians do to lose money.
Do yourself a big flavor and don't mess with the equity in your own home. It'd be a real shame to sacrifice your lifestyle for some out of state garbage.
We have done really well with out of state real estate for about 30 years. Hopefully our out of state "garbage" continues to provide for us. I, for one, like diversifying between California and other places. Also, when looking at places around the US consider places you might like to visit for a tax deductible trip occasionally. A small but nice perk of owning an out of state rental.
- Investor · Los Angeles, CA · Member since 2015 · 325 posts · 75 votes10y
Hello, and welcome to bigger pockets. I enjoyed reading all the comments here. So many different options and different ways to go about it. That is one great thing about real estate, their is not one good way to do it. Having said that, I am an out of state investor living in So Cal. In fact, all my portfolio is in Indianapolis. Basically what I do is I help individuals use some of their savings (IRA, Savings, Home Equity, Stocks) to create streams of income so they can start building a retirement portfolio or feel better about their finances. California is an amazing market, and many different ways to invest. I just find it more difficult to find cash flowing assets compared to some east coast states. Feel free to reach out to me for any questions you may have.
- Lender · Sacramento, CA · Member since 2015 · 112 posts · 62 votes10y
@Terron Winn there are a few items that I'd like to debunk based off the back-and-forth dialogue, and provide my input.
First of all, you can rent out a property with an FHA mortgage. When you apply for an FHA mortgage, it must be your primary; however, circumstances in life can change and you are able to rent the property without having to refinance. Typical FHA stipulations require you to live in the property for 12 months. The other thing you need to keep in mind is you can only have ONE FHA mortgage at any given time. This means, you couldn't apply for another FHA mortgage while you still had the existing mortgage on your first home.
Second, FHA loans in 2011 required MIP for 5 yrs (it's referred to as Mortgage Insurance Premium for FHA loans, and conventional loans use PMI, Private Mortgage Insurance). You cannot drop that insurance within that 5 yr period. FHA loans originated after June 3, 2013 had to pay MIP for the life of the loan if putting less than 10% down. If putting 10% or more down, MIP would be for 11 yrs.
Third, the consideration of rental income in your Debt-to-Income (DTI). This can be a little tricky if you don't have prior landlord experience. You definitely want to consider pro's and con's of each scenario before making any financial moves (ie. refinancing). It's a catch 22 because you want to pull cash out of your current equity; however, this can raise your DTI to the point where you couldn't qualify for the Investment loan or new home loan. This is where a detailed analysis of your financials is required to determine your options. Conventional loans only allow a max DTI of 45%. This means all your debts (housing, credit cards, car payments, student loans, child/spousal support, etc.) divided by your gross monthly pay (your wages/other income before taxes and deductions) cannot be greater than 45%. FHA allows up to 55%. Some HELOCs (home equity line of credit) allow up to 50%.
Fourth, Cash-out refi is limited to 80% Loan-to-Value (LTV) on primary homes and 75% on investment properties. Someone above mentioned only 75%, and that is typically the case with conventional/conforming loans for single family investment properties. If you refi while it's your primary then you can pull up to 80% LTV; however, most lenders have a document you sign stating you will live in the property for at least 12 months so you will run into issues if looking to purchase a new primary home after you recently refi'd your current home as a primary.
I have been in this situation many times, and have been able to successfully navigate all the guidelines and rules. Keep in mind, these rules change almost weekly. In this market, it's typically changing for the better (except FHA and primary conversion rule change in 2015).
Shoot me a message if you want to talk further and determine implications of one choice compared to the other. There is a lot more information needed to ensure you make the right decision.
- San Diego, CA · Member since 2016 · 38 posts · 7 votes10y
Good morning all! Happy Monday.
I Hope you all dont mind that I continue to document my Journey here to share in hopes to gain some great tips and or tricks from the PROS!
This Morning I was informed by @Jesse Hinaman that I am able to remove my MIP; however I have tried in the past and I was denied due to LTV ratio. However; I called again this morning to Harass BOA to demand removal :) It should take between 5-7 business days to receive a response via mail about the decision. (I guess it doesn't hurt to request again).
Again, my initial plan is to go conventional early January 2017 and then pull out equity to purchase a upgraded home for my family and then rent out the first one. Does this seem to be a good idea?
@Dan H. gave great information on why keeping my investments in San Diego makes sense and he gave great facts on why; and I agree. That is my first plan of attack; purchase here in San Diego. (Lakeside, El Cajon, La mesa). .
Am I on the right path?
- 10yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Marina Flu:
@Dan Heuschele
I'm in the LA market and am having a hard time finding a deal. What area are you looking at? Maybe we can talk.
Thanks
My area of preference is Escondido, RB, and Poway duplex through quad. Escondido REI that sell in this domain (duplex to quad) cash flow even with very conservative cap expense, vacancy, and maintenance. Currently nothing is priced to sell in my domain.
It is difficult finding SFR in San Diego county that cash flow with conservative expense estimates. Most SFR that do cash flow require effort or have deferred maintenance that will artificially increase actual cap expenses possibly even higher than my conservative numbers.
I suspect LA has working class neighborhoods that duplex through quad would cash flow.
Good luck.
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