Current home into potential rental?

Question

I bought my first rental property in October! It is a duplex and thanks to biggerpockets.com I learned about cash flow and found the deal and closed on it. Now I am planning on saving up for my next property but plan on moving in a year or 2 and was wondering if it would be feasible or smart to use my current home as an investment property instead. I currently owe $270,000 on it and have roughly $200,000 in equity in Loveland, CO which has been a BOOMING market lately. I just refinanced it for only 2.25% and am paying about $1000 less than what I am guessing I could get for rent. My main question is when we move should I just sell it and use the equity in the house to buy 1-2 rental properties with it or should I turn my current house into the rental property and just try and save up for a down payment on my next house.  There is a new PGA golf course that was recently built very close to my home so I assume the appreciation is going to keep going up. Would it be possible to use a HELOC on my current home to use as a down payment on the next one? Are there other ways to make this happen? Since I am still pretty new with all of this I would like to have a plan and goal in place to aim for but not sure if it's even possible. Thanks everyone!

Seth Quantz · Answer

I just found out I had multiple responses, sorry for my delay, I'm still new to this. So how would I only need 5% down on my next home? Is it through an FHA loan? Would I have to pay PMI if I don't put 20% down on my next one? If I did pull out around $100,000 with a HELOC to use towards my next home and another property I don't think I would be cash flow positive then. I was figuring only to be around $50 cash flow on this current home at this time. Thank you all again for your input. I am a kind of person that really chases after a goal when I set my mind to it so I am really hoping to figure out what makes the most sense for me and drive towards that.

Seth Quantz · Answer

@Ian I Leinwand

Thank you so much for responding! This is also my first post on bigger pockets so I feel that is an accomplishment as well! I think I may end up selling here and using the equity to aquire multiple properties. I am trying to follow my niche of multi-family properties for cash flow but there are also so many single family homes I may end up going more towards that route. Is there a downside to focusing primarily on cash flow in an area that has extremely low appreciation? The area in Michigan that I grew up has some great cash flow possible properties but home prices have stayed about the same since I left 10 years ago. Thanks again for all the information!

Logan McConnell · Answer

I think that a heloc could be a great option for you.  Like Ian said, they are easier to get when you currently live in the property (its your primary) and you will get a better % rate and higher $ amount vs doing it once it's a rental.  You can move out right after the heloc is signed and it will still be valid and legal.  I have talk to my lender about this strategy and had no issues getting the heloc right before I moved out and turned it into a rental.  You can use the heloc towards the purchase of a new home.  If your debt to income ratio is tight for the next home, you can try to get your current property under a signed lease before your loan closing date (even if the lease will not start for several months after you close, they just need a copy of a signed leased with the rent amount).  The bank will subtract around half of the rent amount from your mortgage amount which will allow you to qualify for a bigger loan (because you will have a better debt to income ratio).  For example, if you have a $1,000 mortgage and rent is $2,000, your monthly debt for that mortgage would be considered around $0 by the bank.  This way, the bank will just be using your current income to determine what loan amount you are eligible for and your current mortgage will not negatively impact you.  The other reason why I like this strategy vs selling and buying two properties is because it's much easier to get loans for a primary.  Your second primary home loan should only required 5% down and you might even be able to do better with a VA loan.  If you sell and then by two properties, you will have to put around 20% down on at least one of the properties (because it will be considered an investment property) and the loan rates are typically a little higher for investment properties.  I would hate to loose that low interest rate you currently have.  Also, rates could be up in 1-2 years.

Tina Tsysh · Answer

Congratulations on starting your real estate journey!

I would have to agree with @Ian I Leinwand and say that it all depends on your goals. But, the general advice is that you want to keep all of your deals (unless they are a disaster) and utilize the equity that you have built as your leverage on your next purchases. That's how the wealthiest people in real estate build their empires and leave legacies behind.

Instead of selling your homes (unless exchanging for a bigger multifamily and absolutely have to sell), you want to keep the properties that you already have, let them cash flow, and utilize the equity from those homes as your down payment on your next purchases. It will pay off 100 times in the future!

Ian I Leinwand · Answer

Hi Seth... congrats on your first rental. I'm a rental investor in Fort Collins and Loveland as well as a property manager in Northern Colorado.

I would say it depends on your goals... cash flow vs building equity. There are also some nice perks to selling vs keeping a primary vs coverting to rental. You will not get a rate that low on an investment property on the flip side you can sell your current primary within 2 years of living in it and not have to pay capital gains on the first 250k of appreciation.

Yes you can use a HELOC from your current primary to buy investment properties. I have used this strategy and its great. It gets harder to access the equity in investment properties so open a HELOC on your primary when you are still living there.

Feel free to PM if you have more questions about rental investing in Loveland.

Seth Quantz · Answer

Also wanted to add that it is currently a VA loan.