How to fund our 3rd property?

Question

My wife and I currently have two rentals and we are looking to purchase our 3rd property as a primary residence in August 2017. The basic question is, "Do we put 5% down, or do we re-finance a rental property so we can put 20% down."

Rental #1: Single family home in Colorado (4 bed/2 bath). Purchased in 2007 for 182K, plus10K of rehab costs. Mortgage, taxes and insurance is $950. Current rent is $2,000/month, but rent will be going up to $2,200/month in August 2017. House is worth around 320K. I have 115K left on the mortgage at 4.75%. Because I refinanced in 2009, we are currently in our 7th year of the mortgage. A total of $301 is going to principle and $458 is going toward interest.

Rental #2: Single family home in Florida (3 bed/2 bath). Purchased in 2012 for 95K, plus 16K of rehab costs. Mortgage, taxes, insurance and PMI is $665/month. Current rent is $1700/month, but rent will be going up to $1750/month in August 2017. House is worth around 225K and I have 78K left on the mortgage at 4%. A total of $170 is going to principle, $260 toward interest and $42 toward PMI. Once the loan gets below 74K, the PMI will go away.

Potential Home Purchase: 3 bed/2 bath with an additional 1 bed/1 bath ADU for around 500K. Potential rent on the ADU is $1,100-$1,300. Something around 500K would require less than 10K in rehab costs and pretty much be cosmetic. It's possible to get something around 425K-450K, but the rehab costs would be closer to 25K-50K and a larger project.

We currently have 25,000 in cash. We can save around $2,000/month. We should have around 45,000 in cash in August 2017.

If we put 5% down on a primary residence we will have to pay $314/month in PMI. We could put 20% down, if we refinanced rental house #1.

To me, it seems like a complicated math question.  Any ideas on the pros and cons?

Brie Schmidt · Answer

@Adam Christopher - check with your lender, from what I understand the 5% down conventional program is only available if you do not currently own property.

So that would mean you would need to do FHA, and it looks like property #2 is already in a FHA loan, and you can't have two FHA loans unless you have a qualifying left event

It also looks like you can get the PMI dropped now for property number 2.  You can ask the lender to revalue it and as long as you are at a 78% LTV they should drop it

Personally, I would be hesitant to touch #1 because you are pretty far into the loan, but if you could do a cash out on a 15 year that may benefit you.

I would create a spreadsheet with payments, cost of borrowing, and PMI and put it in a spreadsheet.  Then you can do multiple scenarios and see which option would cost you the least in the long run

John Verduzco · Answer

Brie is right - this is a spreadsheet waiting to happen, but the answer depends on your idea of what good looks like.  in other words, best case is defined differently for different people.  For some, lowest monthly housing costs, for others highest monthly passive income, for others pure cash on cash combined return for any new capital used.

As an example, if my goal was CoC return - I would absolutely free up the equity in the rental (or rentals) but not to tie back up in my primary residence.  I would likely analyze freeing it up for other investments and put down as little as possible on my primary residence (knowing that could increase my housing costs) with the goal of using the capital that I didn't put toward a down payment to create new cash flow to offset increased housing costs (larger P&I and PMI) related to lower down payment.  Another option would be free up equity in rental (or rentals) and set your primary residence loan at a "comfortable" housing cost with 20% down, but immediately put a home equity line of credit (HELOC) in place (you should be able to go to 90% total LTV).  This could give you access to $50K (10% of home value) to be used when you find the next deal, but you won't have to draw on it until you need it.  We like "access" to credit infinitely more than debt or cash.  Lots of ways to do it, up to you and your goals.

Adam Christopher Zaleski · Answer

It should be easy to get a refinance at 75% loan to value for a rental. I called quicken loans for a quote because I already one loan with them. They were not my choice for a mortgage. My mortgage has been sold multiple times and it's currently with quicken loans.

Anthony Campbell · Answer

Where can you get a 90% LTV? The best I can find on my rental property is 60% LTV.  I have excellent credit and live in Colorado.

Adam Christopher Zaleski · Answer

The loan on rental #1 was a conventional loan with 20% down. The loan on rental #2 was a conventional loan with 5% down.

The lender for rental #2 will only drop the PMI on the current loan, if I pay the balance down to 78% LTV, which is around 74K. I'm only 4K away, so it's that not big of a deal.

Upen Patel · Answer

@Adam Christopher, as @Brie Schmidt stated you are not eligible for a 5% down Fannie/Freddie loans you have other properties.

If you have not used up your FHA loan (looks like you have), then you can do that.

Depending on where you are buying, the property might qualify for a USDA 0% down loan. Even if the property does, you and your wife (the borrowers) also would need to qualify. So it a long shot.

Other then that, you option is to pull cash out of one of the properties and do the required down payment, and/or refi the FHA to a conventional and then you can reuse the FHA loan.

Lot of maneuvering to do. Lots of options. Good luck.

How to fund our 3rd property?

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