What would you do in my situation?

Question

SITUATION 1:

I purchased a house with a VA loan (this means I cannot rent it out) for $225K located in Long Island NY. The current mortgage is $200K. The current rental value is $2,400. The PITI on the house is $1300. I can't sell it cause I have no lived in the house in the past 5 years.

Should I refinance out of the VA mortgage and rent the house out?

SITUATION 2:

I have $170K in cash. I am currently stationed in Europe right now so it's hard to get the travel back to the states to find a rental property.

With the above mentioned ... what would you do in my situation? How would you take my situations and invest or create passive income.

Any input is appreciated.

Thank you!

Joe Villeneuve · Answer

Right now, you have equity about $225k in equity.  That equity is losing you money.  That equity is buying you a PV 2 times its face value.  It should be buying you 5 times it.  When you first bought the property you paid 20% of the property value...that's a ratio of 1 to 5.  In other words, you only paid 20% of what the property was worth at that time.

Your equity is really cash that is locked up.  It's much like the cash you have to deposit in a checking account to get free checking (which is a lie).  That $5k you have to deposit in the checking account is a cost to you.  That's money you have to keep in that account, which means you paid $5k for free checking.

Let's do the math.  If you write 30 checks a month, at a cost of $1/check (without free checking), your cost of checks per years would be $360.  Divide $5k by $360 and you get 13.88...that's 13.88 years of checks you paid for in advance, to get free checking.  OK. Where are these free checks?

That equity is doing the same thing for you.  AS it builds up, it's doing so at a ration of $1/$1 of appreciation.  That's free money, that you are paying for because as that equity increases, the value of that money/equity is buying less PV with each dollar of increase.  Selling the property releases the entire amount in your control, and when you use it as a DP on your next deal, it will once again buy you a PV of 5 times it's face value...and your CF will increase dramatically.

Theresa Harris · Answer

You said you have a VA loan and therefore can't rent it, but also say you haven't lived in the house for the last 5 years.  Has the house just sat vacant for 5 years?

Wojciech Grajewski · Answer

@Dave Spooner

Thank you for the article. I will take a look at how much it would cost me to refinance the house but this would be a good avenue to go down.

According to my calculations, I can also pay off the house in the October-November time frame, which could be an option instead of paying for the refinance fees.

Dave Spooner · Answer

@Wojciech Grajewski Paying off the house is another great option! Let us know what you end up doing.

Daniel Smyth · Answer

Rent the house.

As long as the payments clear, the VA will not investigate.

Do this:

Search how many have had their notes called and were made to pay in full because they were caught renting their property.

This should give you an idea of your chances.

Jeff S. · Answer

@Wojciech Grajewski what will happen to your mom?

Joe Villeneuve · Answer

Can you take on a partner in the current deal?  If you can, then have them buy into the deal based on your equity, and split the returns (cash flow and/or flip profit) accordingly.

Wojciech Grajewski · Answer

@Joe Villeneuve This makes sense and I would love to take the house and sell it and put it in the next deal however since I'm stationed over in Europe as a contractor and I have no lived 2 years out of the last 5 years in my home I would have to pay capital gains tax when I sell or trade in for a different property. Also, I can't do a 1031 exchange since it is not a rental property to avoid capital gains tax. I 100% agree with what you are saying. I have so much money tied up in equity and would love to release it.

So I guess the question then is ... since I have $170K in cash I guess the smart thing to do is to buy multifamily for about $800K ... what do you think?

Wojciech Grajewski · Answer

@Joe Villeneuve

I purchased the house 5 years ago for $225K. I live in an old military housing community which means that houses around me are all the same and they are currently selling for about $430K-$480K. Taxes are cheap ... about $2K a year ... insurance is $1800 a year.

Wojciech Grajewski · Answer

@Theresa Harris

My mother lives in the house and takes care of it

What would you do in my situation?

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