First home purchase looking to be profitable - Next step?

Question

Hello BP Community,

I am 24 years old living in Colorado Springs, and just bought my first property last year. Considering I make about 40k a year I am shocked I was able to even qualify for a home at all! I purchased it using a 3% down "first time home buyer" FHA loan for $279k at 3.25%. Since then I've done a bit to the house including fencing, painting, new flooring, tile, etc. The market value without considering the improvements is about 305-330k based off various websites and other resources.

Additionally, at this home I allowed 2 friends and my girlfriend to stay here while I renovate paying a combined $,1550 in lieu of my $1,600 mortgage, and I'm essentially left with utility costs. Obviously about $400 a month for me to live in a appreciating house isn't a bad deal with the way the market has been. However, I'm anxious to acquire another house as well as my girlfriend and I are seeking something a bit nicer. The issue being I need capital! Capital I believe I could get through a re-fi.

My lender has notified me if I re-fi I can then in 2-3 months get another primary residence loan for 5% down, so long as the new property exceeds the value of the one I'm in now. We've been looking at some homes around 400k, meaning about 20k down. My questions are as follows:

1. How much realistically can I pull out from this re-fi?

2. Are there any tips for renting this out quickly? Rates, Etc.?

3. To me this all looks good on paper, but is this the best way to capitalize on my situation or should I peruse a different route?

Any response would be greatly appreciated!

Respectfully,

Devin

Mike D'Arrigo · Answer

@Devin McGinley a couple of thoughts come to mind. Are you buying the other house with your girlfriend? If so, is she putting up any capital? We all think love will last forever but unfortunately it doesn't always. It's not a great deal if you're putting up all the capital especially if it's coming from the equity in your current property and she gets the benefit. That might sound cold but you need to think practically and remember it's an investment. You've worked hard for what you have at a young age.

Craig England · Answer

@Devin McGinley   First off congrats on getting your first home and hacking it!  That's awesome and sounds like the deal is going well for you!

1. Have you asked your lender about how much you could pull out on the refi?  I know you have a little equity but it seems like getting cash out sometimes they want more like 80% loan to value which would leave you a little short.  Same problem me and wife ran into after putting 5% down on our first house hack.  This would take a little longer but with your housing being paid for it would probably not take you long to save the down payment for the next house.

2.  Call a few property management companies.  Sometimes they have no spaces left in the units they manage and would be happy to refer some potential renters to you!  Post an add on Facebook and talk to realtors.  Lots of demand so with a little effort I don't think you'll have trouble finding renters.

3. Will you continue to rent your new house to your 2 friends?  If so I think this is a great plan.  you'll have two properties mostly paying for themselves and a place to live that you are happy with.  Its a natural first step and gets you your first real rental.  That will give you experience to know what you want to do next.  Single family, multi family, commercial..

I am a local investor and insurance agent in El Paso county.  Let me know if I can be of assistance!  Always happy to talk!

Devin McGinley · Answer

@Tanner Pile Thank you kindly for the response. I'm in the process of refining currently so hopefully all goes well. We will definitely have to stay in touch!

@David Mackin David, I agree! I hope to do another primary residence loan with 5% down shortly after this loan. My lender says I can potentially get away with doing it 3-ish months after my refi is complete. Do you agree? Please stay in touch in the future!

@Drew Sygit All great points. I will fully take each of those into account. I'll keep you posted on the success of the refi and which path I take moving forward in the coming moths. Stay in touch please, and thanks again!

@Mike D'Arrigo Mike! I realize I didn't tag you in my response above. Thanks again for the insight, I greatly appreciate it!

Drew Sygit · Answer

A couple of things to think about:

1) If you refi at 80% LTV, you will get rid of MIP and effectively lower your interest rate and payment a decent amount. CONSIDERATION: do this even if you have to bring some cash to the closing as the long-term benefits will be great!

2) Refinancing to a conforming mortgage (FNMA/FHLMC) will also free up your FHA eligibility, so you can put 3.5% down on your next acquisition, but it will have to be owner-occupied.

3) Get a HELOC after the refinance to tap the rest of your equity. You can use this for purchase of next home.

4) Buy units! You will make a lot more if you buy a 2-4 unit with an FHA loan.

CHALLENGE: if you refi as owner-occupied, you sign a legally-binding mortgage document that states you will owner-occupy the property for the next 12 months. Buying another owner-occupied property within those 12 months may be construed as mortgage fraud.NOTE: there are many investors who unknowingly put themselves at risk of this by listening to agents & loan officers that have commissions to gain and little, if any, liability in advising/assisting you. There are also investors that knowingly do this, gambling they won't be caught.

PARTNERS (girlfriend): if at all possible, avoid buying a property with partners and having anyone else on the mortgage with you. If your girlfriend wants to contribute to any down payment, she will have to technically gift the funds to you. It would be mortgage fraud to enter into any formal repayment agreement with her. Of course, you always have the option of paying her back if you choose.

David Mackin · Answer

@Devin McGinley @Tanner PileKeep in mind, if you refi into a conventional loan, you open up your FHA benefit and can use it to purchase the next property as a primary. This might help you with your decision.

Looks like you've put yourself in a great position. I wish you the best!

Tanner Pile · Answer

Hi @Devin McGinley,

Congrats on house hacking your first property!

I would definitely look to refi ASAP to get some cash out towards your next property. As for getting new tenants I would start with putting adds on Facebook market place, Zillow, or apartments.com. How do you have your friends pay you? I use apartments.com and it works very well. You'll be able to post your listing and collect rent all from one place. This is how I found my roommate I house hack with.

For your next property finding a multi-family would be great but most lenders will require more than 5% (ideally 15-20% if you're living in it having already used an FHA loan). In the Colorado Springs market I have seen many SFH with the capabilities to be turned into a duplex. This could be a good option for you and your girlfriend to have a private nice space and rent the other section to your friends.

I typically see these types of SFH turned duplex going for around 390-440 on the west side of town. It is important to find one with the proper zoning for multiple units.

If you decide to sell the property I believe you would be eligible to use your FHA loan again for a multi-family property which could be a proper duplex, triplex or quad and you wouldn't have to worry about the costs for turning a SFH into a duplex. Many options for you!

I'm a real estate agent in the area as well if you have any questions and want to connect for coffee some time! We also have a property management team if you're interested but I think you'll be able to find a renter just fine!

Devin McGinley · Answer

Hey Mike! Thanks so much for the response! I don't think it's cold at all and far closer to a reality which is important for me to keep in mind. She is willing to put up 50% of the down payment and 50% of the mortgage beyond that, she currently even pays rent in the home we occupy now. With that said, I think I would need to create some kind of emergency contract in case we split up. Seeing that the property and loan would be in my name and we'd both be occupying it.

Potentially better if I just save and buy my next one on my own to avoid potential conflict. Until marriage happens anyway.

Which makes me wonder if selling my current one and using the 40k(ish) in proceeds to purchase a home and then use the remainder for a new investment. And or buying a place now and doing a re-fi on this one later on. So many options and routes!

Thanks so much regardless!

Devin McGinley · Answer

Hey Craig! Thanks so much for the response and insight. That's a good point about the 80%, that's actually something I learned shortly after posting. I am a bit weary of that considering I'm probably right on the bubble. However, I'm thinking I will follow through on the re-fi and at the very least I can lower my current payment from $1,600, so that I can actually get some solid cashflow from this place. I may have some assets I can sell and use towards 5% on our next house and we do plan to bring at least one roommate to lower the burden of the new mortgage. You've definitely reassured me that this could work, thank you!

Also, I work closely with the Insurance Industry being that I operate a local roofing company. I know some companies allow agents to refer contractors. If so, please do and we can pass on some commissions from time to time. Thank you regardless!

First home purchase looking to be profitable - Next step?

Most Popular Reply