How can my mother buy a new home and not sell her current home?

Question

My mother has her current home which she bought for 108k about 4 years ago, her house is now worth around 240k. Her mortgage on the home is around $800 monthly. Here is the situation, she wants to buy a new home and needs to sell her current home to use the equity for the down payment towards her new home. I'm trying to find a way where she can keep her current home with the mortgage of $800 and rent it out but at the same time buy her new home without having to sell or refinance her current home. Why? Rent in her area is $1400 on the low end and her home has 2 master bedrooms and a decent sized lot, with a new kitchen and bathrooms. She also is curious about the idea of renting it out but keeps telling me she has to sell it in order to buy the new home. I'm barely stepping foot into real estate but I'm reading into a lot and listening to anyone who has any advice for me. I know that I can find a way for her to do this and I want to find it. So just to have a simple question. How can my mother keep her current house and buy a new home without having to sell her current home?

Chris Mason · Answer

Hi @Tyler Gebert,Either your mom is getting some poor mortgage advice, or some stuff is getting lost in translation here. Pull a little equity out of the current house. That solves the down payment problem. I'd suggest pulling enough out for 20% down. If you need me to do math to show why 20% down is better financing on a primary residence than 3.5% or 5% down, I'll happily oblige.Within two weeks of going into escrow on the new purchase, find tenants and get them to sign a lease and make a security deposit. Rental income is mortgage qualifying income. - this takes care of DTI issues.Maybe Tyler G gets his feet wet in the world of landlording by being property manager, so Tyler's mom doesn't have to do squat but cash a check each month, because Tyler's mom was such an amazing mother that she's earned an easy paycheck each month (ya know, that whole "18 years" thing).This was actually a pretty easy mortgage problem to solve, by BP member standards. :P

Donnell Durden · Answer

This seems pretty simple. She's in a win win win situation. When he say "pull out" he mean refinance the current loan. If your mother has equity in the current home then she can go to the bank and loan against that equity to get the 20% down payment on the new house. Her mortgage may go up a big because of the lost equity but she can make up the difference with the rental. She currently pays $800 and makes no income / cash flow Her mortgage may go up to $1100 if that But she will now be making $300 in passive income. Essentially being paid to live in a bigger place.

Mike Dymski · Answer

I'd recommend running the numbers on her current home as a rental and bench-marking the return on it relative to other rental properties or investment alternatives to determine if it is a good investment. $1400/mo on a $240k property is not a good investment unless it has (predictable) appreciation. There are rental property calculators on BP, the web or you can make one in excel. If you are taking the potential rent and subtracting her current or potential new mortgage payment, that is not a relevant exercise to determine if it is a good investment.There are weekly posts on BP from new members wanting to convert their old primary residence to a rental and, in many cases, it's a bad investment decision and, in all cases, it's limiting (only one property is being analyzed). You also can loose the tax deferred gain on sale treatment. There are cases where it is a good investment decision...don't know here without (predictable) appreciation figures provided. Keep asking questions and members can help...good luck.

Chris Mason · Answer

Hi @Tyler Gebert,You'd have to run numbers to ensure it'll still be cashflow positive as a rental. Or, sell it after she closes on the purchase of her new home (which is actually her goal) and then cashflow doesn't matter because she does not own it.

Tyler Gebert · Answer

@Chris Mason I cant really understand your first point to well, again im not that knowledgeable when it comes to real estate quite yet. If her mortgage did increase past $800 wouldn't that make renting the house out a bad idea? She wouldn't have as much cash flow? What would you do in this situation? More to add, she just talked to a real estate agent today and the house is now appraised at $280k and she bought it for 108k. If that changes anything. Thank you

Chris Mason · Answer

It certainly would. If she sells it, then however much less she nets when she sells is about what she would have put towards the down payment had she done it in the 'normal' order of operations (eg, pulling $40k out now and netting $40k less when she sells is about the same as selling it, and immediately putting $40k of it towards DP).If she keeps it, the tenant is paying her mortgage (and then some) so who cares (it's the BP way, haha).

Tyler Gebert · Answer

@Scott Weaner I will have to look into that a little more first. I never heard of it. Thank you.

Tyler Gebert · Answer

@Patti Robertson I have more to the story now I just talked to her. She wants to do the 20% down to avoid PMI. Then she wants to sell the house so she can use the $125k equity towards the new house so that her payments arent as high. She plans to buy a house for around 375k and use the $125k equity to bring the loan down to $250k which would have lower payments. So I guess my new question would be what if she pulled 80k equity out of her current home to cover the 20% down on the new home, would the mortgage of $800 go up since she just took equity out of her home?

Tyler Gebert · Answer

@Chris Mason Ok so if she pulled out a little equity wouldn't her mortgage go up?

Scott Weaner · Answer

Maybe she can get a HELOC on the 1st home to help purchase the second?