Turn Primary Residence into First Rental? Help Me Decide

[Shaun Callais]

My wife and I are in the process of doing a cash-out refi on our primary residence in Utah. We owe about $129k and the house is valued around $290k. At 70% LTV I can borrow $73,500 at 3.125%, 30-year fixed interest rate. We are currently locked until May 21. We can potentially borrow up to 85% LTV, around $117,500 although it may increase the rate by 0.5%.

Our plan is to borrow $73,500, put 20% down on another single family residence that would cost around $250-275k (in Charlotte, NC), put the additional funds into savings, and rent our current residence for $1,500/month. Our current escrowed mortgage would increase from $895 to $1,056 per month. The monthly amount that would go toward paying the escrowed mortgage on our current residence is $740. We would charge $1,400-1,500 for monthly rent on our current residence. I know that’s a bad rent ratio, but we would be interested in using a good portion of the equity for other investment opportunities. No repairs or updates are needed at the moment, as we initially intended to sell the home, and put about $60k and hundreds of hours of sweat equity in the home over the past 5 years.

After reading this sub, and reading the Cash Flow Quadrant, I’ve started to think that perhaps I should pull out as much cash from this home as possible ($117,500), purchase an investment property (duplex?) using cash, find tenants to occupy the property, wait a few months and pull out a mortgage on the property. After obtaining financing, I would purchase another primary residence, then rent out this home. This method would allow me to purchase an extra property using the equity I already have in my home.

I’ve also heard about going the lease-purchase route, or doing something similar where I could only put 10% down and purchase several additional investment properties. What advice would you give me, based on the information I provided? I’m happy to explain my situation in more detail.