HELOC and my First Deal

[Ryan G.]

Howdy BP! My first real post involves, of course, a question. Thanks in advance for everyone’s input. I welcome it all, including angles I haven’t thought of or considered. This is my first deal(s) and my main concern is the financing structure. At the end of the day, we have to be in a position for a 2nd mortgage that will be our primary residence for the time being. I am looking for potential limitations, road bumps, etc.

Currently, we have over $80k in equity with our brick and mortar 3 bed/2 bath in a popular suburb of Houston. The house is appraised at $189k. Rental comps from $1600-$1800/mo. We also own two mobile home lots (37’ x 110’ ea.) with a small 2 bed/1 bath mobile on it. All of this is free and clear in a nice lakeside subdivision a little farther from Houston, but still an easy commute.

I want to take out a HELOC against the equity in the brick home. Move the 2/1 to a park nearby. Hunt down and buy two used 3/2 mobiles to place on the newly setup lots that the older mobile was on. Still with me? At last, I want to rent out the brick home. By my numbers, our equity position will go from $110k (including all property as they sit) to $86k (after deducting $50k to cover the HELOC). Each individual trailer in the lakeside community will be worth more than $40k and the older (1996) trailer in the park could go for $16,500 (owner finance) plus we will still have $30k in equity at the brick house. Seems like a good move considering it will all cash-flow $2,000/mo. after the mortgage on the brick house (which includes the new HELOC).

Question? What should I expect when applying for a new mortgage, since once everything is in place, I will be homeless and in need of a house. I am looking at property in the same price range, capping at $220k. Any ideas or advice? Thanks again!

[Ronald Perich]

@Ryan G.,

You'll probably get some flak when purchasing the new house if you've just taken another loan against your current primary residence. The lender will see a high debt to income ratio and may not allow you to get a loan, or they'll give you one at a higher rate, charge you points, etc.

I applaud your efforts and creative thinking. I'm curious why you are thinking of renting out your current primary residence? 

I realize your plan will cash flow after it's all in place, but the house on its own seems pretty thin. Assuming some standard numbers, you're looking at a refinance PITI of around $1,200/mo. That's about 70% of your rental income. Is there really enough left to make that property, on its own, cash flow? Or are you hedging that there will be property appreciation?

If you're doing a HELOC, then you actually have two mortgage payments to cover. That will make it even more difficult to cash flow on the primary house. I realize you're getting payments off the mobile homes you move onto your lots, but what happens if there are issues getting them rented or approved by the city/county? Can you cover the original primary, then HELOC, and the mortgage on your new primary residence?

Honestly, I'm not trying to dissuade you. But if you are looking to maximize your cash flow, then keeping and renting your current primary residence might not be the best use of that equity. Selling it and using the cash might allow you to buy something that cash flows better. Or use the HELOC to get things started but don't move into a new house.

I'm not the one who needs to make the decision. It's your preference and goals that matter.