Purchasing With Equity?
I have owned a single fam home for 3 years and the value has gone up considerably. I would like to purchase a 2 fam home in the same town but I don't have any cash to put down. I want to rent my single fam home and move into the 2 fam and rent the other unit.
My current mortgage is $162,000 on the single family at 5.7% interest. This home was appraised at a minimum $240K. I want to purchase the 2 fam at $285,000.
The rental properties in my town are good and do well.
What would be the best way I could go about this? I'm not sure if I should stay in my 1 family and rent out the 2 fam? Also, I'm afraid to go over my head with already a mortgage on the single fam and plus a 2nd mortgage for the downpayment and a mortgage on the 2 family. Also, I assume that I would need to purchase the 2 fam first and then put the single fam on rental market otherwise, I won't have a place to live.
Any advice, ideas, suggestions would be greatly appreciated.
Thanks,
Ben
Ben,
You have a great problem!!! First, you need to decide what the rents are going for your area for single families. I assume you already know what the are for 2 families since you are looking at one for investment. If you can rent out the single family to cover your mortgage and also a part of the second mortgage on your 2 family you are golden. You are will want to live in the 2 family to get a lower rate since it will be owner occupied.
Now for the $$$. Take out a Home Equity Line from you current residence with the equity of $78k and use that for a DP on the 2 family. If your credit is good you can get into this for probably next to nothing. So, I would then take the remainder of the money that you have from your Home Equity Line and get another property once you are comfortable with the duplex.
Feel free to email me with any questions.
Thank you very much for your sound advice. I would appreciate some more input.
I’m told that single family homes in my area rent between $2,100-2,500 per month. My mortgage on this single family is approx 1,600 per month. (includes taxes/insurance)
The rent on the 2 family house that I’m interested in is:
$900-$1000 for the first unit and over $1,400 for the second unit per month. Taxes are $6,427 per year. (I estimate that if I put down (20%) $60K to the $285,000 cost of the house that my mortgage payments would be approx $1,900-2,100 per month inclg taxes/insurance)
I did not realize that if I live in the 2 family that I would get a lower rate since it is owner occupied. On this note, I believe there may have been a occupancy clause in my first mortgage of the single family.
I see you recommend a Home Equity line instead of a 2nd mortgage loan? Any reason? I believe lines of equity don’t have fixed rates and that uncertainty is a concern for me. Also, you suggest $78K as DP. I was thinking of 20% DP. My credit is good and I have no credit card debt.
Having no credit card debts is not necessarily a plus point. Actually, seems like you have only one trade line i.e. your existing SFR mortgage; and that might have a negative effect on your loan pricing.
My 2 cents worth is that you shouldn't get a Line of credit because of the same reason you are uneasy about it - why not lock a rate when its set to go up for the foreseeable future.
Seems like you know your numbers well, so no comments there. In terms of how you should design the funding:
- apply for a refi on your existing first, and take the cash out of that. It will be cheaper than a second, and you will continue to pay only one bill. If you have 'good' credit your rate will be between 5.5-6%. If you presently have 5.25% and feel weary about locking in 5.5%, think again coz the difference in payment is probably $10 or so, and you will save on the headache of not having to pay 10 mortgage payments.
- Next, make the 20% down as you thought of, and ask for a owner occupied mortgage on the 2nd property, if you want to live in it. It doesn't matter that you have agreed to live in your present property as a primary residence when you took out the loan initially on that property. Lenders know that people change homes, invests in new homes, and therefore there is no law that will put you in trouble if you move home. Since you want to live in the 2nd property, simply ask for a owner-occupied loan, and lock in the lower rate.
If I were you, before you finish through the purchase transaction, get renters for your properties asap!
Hi,
Thank you for your advice. I had not considered refinancing to get cash out. One disadvantage I see with this is that I would have to start making monthly payments on this cash before purchasing the next home to rent. Without any property to rent, I'd have to come up with the additional money. On the other hand, with a line of credit, the money would just sit until the right opportunity to purchase arises. So, I see that there are different ways of going about this depending on my comfort level. If I did go the refinancing route, only problem might be that I am about to get an appointment to close on a refinance this month already. I think at this stage it might complicate matters.