Should I sell my condo to qualify for bigger loan?

Question

Hello everyone, I'm new here and today is my birthday and look where I am, BigggrPockets because I'm determined to become a successful real estate investor one day (best if sooner than later :-) while being a single mom and working a "9-5" (more like 8-7pm which is why I'm looking to change that with real estate) and I think you guys are great, so thank you in advance for your help.

I bought my condo almost 8 years; I don't have much equity on it and I think my best option to get started is to to buy a duplex or 3 family house where I can house hack because as a single mom I think will free up most of my expenses which in return I'll be able to save it all and use it to save that 20% to buy my next property. Problem is I don't have the 20% cash right; most of these duplexes in my area (I'm in CT) in a decent town that I would consider are between $250k and up West Hartford would be ideal for me but there they are much higher.

I thought about getting a personal loan so I can have the cash in hand when I find the property bc all the good ones go pretty fast but this will limit my buying power and I'll be paying higher interest or sell my condo so I can qualify for a higher conventional loan and only have to come p with the 3-5% as supposed to 20%.

What do you guys think? Is there another option I haven't considered? Any input would be appreciate it.

Thank you

Liz - future real estate investor

David Wolber · Answer

HAPPY BIRTHDAY@Lizbeth Castellano!! To add to what @Jaysen Medhurst said, you can get a conventional loan with 5% down while still keeping the condo ONLY if you plan to make that your primary residence. At a purchase with less than 20% equity position, you will have to pay PMI in addition to the mortgage P&I. I have a duplex in New London I did exactly what you're describing and we paid the PMI so we kept the extra 15% for renovations. Now it's a cashflow beast and i'm still paying the PMI each month, but don't care because having the extra cash at the time was far more worth it than the extra $120 a month I pay.Have you looked at what renting out your condo looks like? Something to remember about renting out a condo is the condo declaration documents may have a restriction on renting it out. Some is a residence requirement (live there for at least 2 years) and others have an overall community percentage (only up to 45% of condos can be non-owner occupied for example). Then again there may be non at all. As far as a rental goes, if the combination of mortgage, HOA and other standard holdings are covered by the rent, it's usually a great rental. In my experience with condos you get the easy of placement of a multifamily and the long term tenants like a SFH. Some, and I do mean SOME banks may even use a percentage of projected rent for the condo to counter your DTI.Obtaining a personal loan for the down payment won't work as the bank will view that as financing the down payment. They frown upon that. However, if you have a 401(k) with your work, or a different retirement product that is allowed to borrow against, IRS allows up to $50k borrowed. Most banks don't see this as a loan, they see it much like an equity line of credit. Speaking of equity, are you SURE you don't have any equity in the condo? Are you using something other than a Zillow estimate? Something like MLS based comps for other units in the complex for example. I mean no disrespect or insult of your intelligence, but often times people take that estimate as gospel who are just unaware.Keep this drive! It'll pay dividends on the back end for sure!!-Dave

Lizbeth Castellano · Answer

@William Collins Thank you William :-) See below: 1) Where is your condo? Newington 2) You mentioned West Hartford as a market- so I sense this is combining several goals in one so let me check: A. Are you moving to this town from another town?- potentially, yes B. Does this move you closer to your work location? - no, I'm about same distance C. Does this move you to a better town for your children's schooling?- I use to live in West Hartford and while Newington schools are good; I did think West Hartford was better D. Or is the decision on West Hartford based on quality of town- I do think West offers a good / better quality of life but what's most important to me right now is a decent school district and cashflow; so I'm considering other towns. I've been trying to figure out of any towns in CT have "up and coming" potential but not sure I found any yet, West Hartford is not the best town to cash flow in, but would be a great house hack, and could be a way better situation for your family.. I want/ need cashflow so if West Hartford doesn't work i'll likely go elsewhere. Thank you David

Lizbeth Castellano · Answer

@David Wolber Thank you :)! Yes I've considered renting my condo; I have to look into the restrictions / qualifications as you mentioned I but I believe its contingent on not exceeding a over a certain percentage of rentals. I worry about the HOA fees and if they continue increase how that may eat up all my potential cash flow. To be honest, I'm not sure about the equity; (btw, not offended at all, glad you asked me) because after your comment I'm thinking I need to give this serious consideration and now I'm going to look into this further, thank you David!

William Collins · Answer

@Lizbeth Castellano first off happy birthday!1) Where is your condo? Depending on your area you could cashflow nicely if you rented it.2) You mentioned West Hartford as a market- so I sense this is combining several goals in one so let me check:A. Are you moving to this town from another town?B. Does this move you closer to your work location? C. Does this move you to a better town for your children's schooling?D. Or is the decision on West Hartfford based on quality of town.West Hartford is not the best town to cash flow in, but would be a great house hack, and could be a way better situation for your family

Jaysen Medhurst · Answer

Talk with the loan officer, it will all depend on your credit, DTI, income, etc., @Lizbeth Castellano. You will likely be pre-qualified without selling your condo, but if a new mortgage will blow up your DTI, the lender may insist that you sell that before closing on your new place.

Lizbeth Castellano · Answer

@Jaysen Medhurst Thank you so much for your response Jaysen, just to be clear, your saying I may be able to get a 5% down conventional loan while I have my condo, or after I sell the condo? All of the towns you suggested are on top of my list; all good towns with great school districts. Thanks again!

Jaysen Medhurst · Answer

Good on you, @Lizbeth Castellano for getting the ball rolling. Learn all you can and analyze, analyze, analyze. Gotta get those numbers in your bones.I would look to do a 5% down conventional loan. Get pre-qualified now, so you're ready to make an offer when you find something. If you didn't have kids, I'd say sell your condo now and move to a month-to-month rental, but you don't want to shake them up twice in 6-12 months.No knowing your logistics, I'd also recommend Glastonbury, Avon, and Simsbury. Somewhere with great schools where you'll get good rents and appreciation. You may not be able to totally eliminate your housing costs, but you'll cut them down significantly. Take a look at these properties: Glastonbury 1, Glastonbury 2, Avon, West Hartford, Simsbury.