Next Steps once I fully own property
Jacksonville, FL · Member since 2017 · 4 posts · 0 votes
Next Steps once I fully own property
5 Replies
- 2wArman AhmedPro MemberReal Estate Agent · Columbus Cleveland Dayton, OH · Member since 2024 · 2k+ posts · 904 votes
Quote from @Zenobia Jackson:
Hello I am new on the Forum and I read a article by Garrett Brown on How Nathan Nicholson Cashed Out His 401(k) to Build 23 Rentals…this article for me was spiritual as I just purchased a new home and was going to sell the home I live in now. It was always a thought to keep it and rent it out but I did not want to be bothered with the Landlord thing. After reading the article I felt this was a direction because I still was not sure. The article was very detailed however I would like to know more. If I choose this direction I would be paying my home off in full and I would like to know more about how Nathan used his Equity in his property to then purchase other properties.
If you’re comfortable keeping the home as a rental, using the equity to fund your next purchase can be a solid way to grow without starting from scratch. The key is making sure the numbers work after financing, repairs, vacancy, and management. I’d also compare Midwest markets, where lower purchase prices can make it easier to stretch your equity and build the portfolio.
- 2wQuy HuynhBusiness MemberLender · Huntington Beach · Member since 2023 · 10 posts · 6 votes
HI Zenobia, it's nice to meet you here.
Your question is really a lending question more than a real estate question, so let me take it from that side. I do not know the specifics of what Nathan did, so I will not guess at it. There are only two mechanisms for turning equity in a property you own into money you can buy with, and everything you read about is one of the two.
The first is a cash out refinance with a new first mortgage replacing the old one at a larger balance, and you take the difference in cash. The second is a second lien, which is a HELOC or a fixed rate second / 2nd MTG. That one leaves your existing first mortgage where it is and goes in 2nd lien position. That sounds obvious written down, but it is the part that gets skipped in almost every article. You are not unlocking money you already have. You are borrowing against the house's equity at a payment, and that payment follows you into every approval after it when factoring Debt to Income ratio (total monthly debt divided into usable, verifiable income on a full documented loan)
Here is what governs how much you can actually pull, occupancy sets the ceiling. On a one unit primary residence, a cash out refinance caps at 80% of value (1st loan) and could get more if you do a 1st and 2nd /HELOC. On a one unit investment property it generally caps at 75%. Your plan is to move out and rent this one, so 75% is the number to plan around for example purpose.
Than there is seasoning, on a cash out, at least one borrower has to have been on title six months before the money is can be taken out as a cash out refinance. You have owned this one a while so that is not your issue, but know that it exists.
Now the part that will actually decide whether this works, and it changed recently. When you keep your old home and rent it out, that is called a departing residence, and as of September 2026 the agency (Fannie Mae - Freddie Mac etc) rules on it are specific. You cannot use a lease to prove the rent amount. Leases are not permitted on a departing residence at all. The rent has to be documented as market rent, from a full appraisal, a Form 1007 rent schedule / rental survey, or a market analysis using at least three comparable rentals.
Then the math is not what most people expect, the lender takes that market rent, multiplies it by 75%, and subtracts the full payment on that house, meaning principal, interest, taxes, insurance and any HOA. If what is left is positive, it offsets that house's payment and nothing more. It does not turn into income you can use to buy the next one. If it comes out negative, it goes straight onto your debt ratio.
And if you have less than twelve months of experience managing rental property, plan on six months of that house's full payment sitting in reserves. DSCR / Debt Service Coverage Ratio program acts different program and it underwrites different.
Three suggestions.
1: Run the numbers before you pay it off in full, If you pay the balance to zero and then cash out, you are paying closing costs to borrow the same money back, at investment property pricing, capped at 75% instead of the 80% you would have had while it was still your primary. Compare that against keeping the loan you already have and using a second lien instead. Sometimes paying it off is the right answer. It is rarely the right answer by default, and the article is not going to tell you that.
2: Get the market rent documented the way a lender will document it, before you commit to anything. Not a Zillow estimate, not what the neighbor says he gets. Three real comparable rentals, or a 1007, then run the 75% calculations yourself and subtract the full payment. Do that on paper first, because that one number decides whether the next purchase works or not. You can also ask a local real estate agent or one you know to help provide a projected rental amount.
3: Fund the reserves and the first year separately from the equity. Six months of reserves is a rule, (reserves is 6 months of PITI payments and HOA if applicable) but the real reason behind it is that the first tenant, the first vacancy and the first repair all show up before any of this seasons. People who get hurt on their first rental are almost never wrong about the strategy. They are just thin on cash the month the water heater goes.
One last thing, and I say this as someone who reads files for a living. You said you did not want to be bothered with the landlord thing. That instinct is data, not a weakness. Property management runs 8%-10% of collected rent in most markets. Put it in the numbers now rather than assuming you will handle it yourself, because if you assume it and then hire it out two years in, the deal you underwrote is not the deal you own.
For those of you who kept a primary and turned it into your first rental, did the departing residence income rules come up on your next purchase, or did you have enough income to qualify without leaning on the rent?
West Group Capital, LLC powered by NEXA Lending, LLC- Jacksonville, FL · Member since 2017 · 4 posts · 0 votes1w
Thank you for this information I. I do have some more questions and will reach out soon. a lot of information and I not clear that I fully understand as of yet sometimes it takes me a few reads to get it. Thank you very much again.
- 1wDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Zenobia Jackson if you have lived in the property as your primary residence for two out of the previous five years, you could get the primary residence exclusion. You would be able to sell and take the first $250k ($500k if married) of the gain tax-free.
Even if you decided to rent the property out to see how it does as an investment, you would still have exactly three years from when you convert the property to take advantage of the primary exclusion.
If you don't qualify for the exclusion and decide to rent out the property, it would then qualify for a 1031 exchange. This allows you to defer all of the capital gains tax and reinvest it into any type of investment property If you decide to sell in the future. You could use all of the tax savings to find nicer investment properties with better performance potential.
The 1031 Investor5134 Reviews- Jacksonville, FL · Member since 2017 · 4 posts · 0 votes1w
Thank you so much for this information I appreciate it and will definitely follow up on it
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