All Forum Posts by: Quoc Tran

Hello Wonderful People of BP,

I am looking to consolidate the loans on my primary home and would like some advice on how to go about it.

A little backstory: I am currently house hacking a SFH, renting out 4 bedrooms. I intially acquired the home for $490,000 and was advised by my realtor to do a 80/10/10 piggyback loan. This was my very first home purchase (and before I found BiggerPockets) so I took her advice because she, herself, was a seasoned real estate investor. She has been in business for 20 years and seemed to know what she was talking about. The idea was to eliminate PMI on the first mortgage because it was at 80% LTV.

I financed the home purchase price by doing 80% with a 30yr conventional at 3.99%, 10% with a second mortgage at 6.5%, and 10% cash downpayment. The second mortgage is 20yrs ammortized, with a 7 yr balloon. I've had this house for about 2 years. The total monthly mortgage payment for both is $2600 (P+I+escrow) and I get around $3300 from rental income. It's not a bad house hack, but something about the piggyback loan always bugged me and I did not know exactly what... 

Current Situation: After listening to BiggerPockets podcasts, I realized that no one ever talks about using a piggyback loan. And after doing my own math, I would have saved $50/month by just financing 90% of the deal in the first place! My agent's advise was bunk, and I was too dumb to realize it.

I've been shopping around for the last month to see if I could consolidate these two mortgages into one. I am in the final stages of a refi with Quicken and all that's left is to sign on the dotted line at closing. Both balances will be conslidated into what they call a "hybrid loan". It's 30yr amortized, fixed at 3.99% for the first 10 yrs and adjusted rate after that. Loan amount of $435,000. To me, this sounds like a fair deal because I am maintaining the rate on my first mortgage, eliminating the high 6.5% rate mortgage, and I don't plan to keep the house for more than 10 years. My new monthly payment would go from $2600 down to $2433.

However, the net closing costs seem pretty high at $10,000 and makes me feel uncomfortable tacking that balance onto my existing amount and basically eliminate a year worth of loan pay down. Also, a savings of $157/month is not very much compared to $10,000 in costs. That's over 5 years to break even.

I got a quote from AmeriSave. They would do the exact same loan, but with $6000 in closing costs. They're just not as reputable.

So, what would you do in this situation? It seems like a lot of investors recommend going around to local credit unions or community banks. What kind of closing costs should I be expecting?

Thanks in advance,

Quoc

Nick, what is your level of experience. Have you ever done a deal or managed a property?

In general, you'd want to follow the 1-2% rule, such that your total rent would be 3000-6000 per month for the entire building. I'm not sure how Chicago's market is like, or if you can demand that much rent, so you will have to do some comps in the area and see how much a 3bedroom condo and a basement unit is renting for, then work up from there and decide what makes sense. Since the current rent is 2900, I would get the seller down to at least 290k, or determine if any improvements can raise the rent in the 3 bedroom unit.

You will absolutely learn more doing things yourself at first. My first property was a house hack, so I got to learn how to be a landlord and take care of a house all at once. My biggest mistake was not blowing out the sprinkler system before winter! It's a mistake that flooded my basement and ruined all the sprinkler valves and backflow preventer. But, what I learned was how to dry out a basement, repair a sprinkler system and winterize it, and what kind of effort it takes to do all of that. Costed me about $200 and a couple weekends of labor. I'd say my time is worth a lot more.. so maybe a grand total of $700? Regardless, the knowledge gained is priceless. If it ever happens again, I'll have a feeling of what price I'm willing to pay to remedy the problem.

Thanks for the post, @Mindy Jensen. It's astounding that the title company has had 30 previous occurrences of this issue and has not taken the proper steps to safeguard their network. Cyber attacks are on the rise and hackers are becoming smarter every day. 

To all of our members here at BP, please protect yourself by setting up good and different passwords for all of your financial and critical accounts (banks, credit cards, brokerage, etc.) Try not to use passwords that include names of your spouse, kids, or pets, or any numbers that can be found publicly like your phone number, anniversary, birth date, address. 

Also, use different passwords for different websites. A simple way to create a memorable password is to embed the initials of a webpage in your password. Be creative and use your own method that ONLY YOU know.

Example: login: User at BiggerPockets.com -> PW: "***BP***"

@Michael S.

I'm actually near the Denver market, which has some of the most inflated properties in the nation right now. Are there 1% rule properties in Denver? Sure are. I'm not sure how the market is in Austin, TX. But there are deals in every market. It's about how hard you want to work to find them, and there are a handful of methods you can use to find deals (direct mail, driving for dollars, MLS, etc.) Read up on how to find deals and how to spot a deal. BP has a lot of resources on this subject. Best of luck!

Another thing to consider... What if your sister wants to move out? Will you sell the house? If you do sell the house... what if the market is not in a good condition for you to sell it, such that the value of the house has dropped? If you plan to keep the house, you'll need a property manager since you'll be in New York. It's good to include property management in your monthly expenses, regardless of the situation. But it's really up to you and how you want to deal with it.

An important part for you, as the investor, is to make sure the property you're buying is a deal. At $185k with a $1,500 average monthly rent, you're not even hitting the 1% rule (1% of the purchase price should be the monthly rent). Unless you can pull in $1,850 per month, or bring the seller down to $150k, this isn't looking like that great of a deal. Keep looking and be patient :) Deals come and go, so don't let your emotions take over. 

Seems like a short, handwritten (or printed to look handwritten) note is what a lot of people do, and have success with. Something along the lines of...

"I really want to buy your house. Let's talk. - Destin (xxx) xxx-xxxx"

Sweet, simple, to the point. IMHO, a message that's any longer seems too solicit.

@Jan B.

You've probably heard of the concept of "Bad Debt vs.Good Debt". Bad debt includes things with high interest rates greater than 10%, such as credit cards with their 25%+ rates and parking tickets with late fees. This is debt you do not want to hold on to, and you want to pay these off ASAP.

On the other hand, there's good debt, such as student loans, mortgages, etc. These debts usually have an interest rate less than 6%. In your case, it would be okay to hold on to the mortgage debt because it's making you money in the form of cash flow, appreciation, and loan-pay-down by renting. The low interest rate will eat a little of that cash flow, but as long as you're on the positive side you'll be fine. Leveraging loans so you can make passive income is all part of the game! :)

@Andy D. Check out this guy's DIY. He use two angle irons to create a bottom rail. Pretty inexpensive, but effective. https://www.youtube.com/watch?v=y6SydJiNBnc