Rental Property Options. Good Move?

Question

Hello BPers,

So before I was saying I had good credit but no cash reserves so due to not giving up I believe I can get the cash reserves and also gain two rental properties. Tell me what you think about this situation.

It's kind of a double whammy. So my soon to be wife has a home under her and her brothers name that is due for refinancing. We have to refinance regardless to remove her brother and add me so I was thinking we could do a cash out refi or Home equity loan to obtain cash reserves. There is about 30% equity based on the original purchase price not current market value which would put it closer to 40%. I just don't know if the cash out or equity loan would be based on current market value or what the home was purchased for.

After this we would then starting looking for a new home leaving the existing home as a rental. Secondly her mother needs to move in with us and she has agreed to sell (for next to nothing) or gift her home to us and this would give us a second rental property at the same time.

Any advice on this situation? I believe this will play out nicely but I would like to hear others opinions.

Thanks in advance!

Keith Rowel · Answer

@Drew Castleberry

I got some great info from local property management companies thanks for that tip.

Drew Castleberry · Answer

Call around to a few property management companies and ask them what they think it could rent out for, they'll be able to give you a pretty good idea, and about how long it'll take to find a tenant.

Keith Rowel · Answer

@Drew Castleberry

I really appreciate your time.

I think we may just refi on the conservative side and take the win on lower payments and higher cash flow.

I am not sure what the "other tax" is either but I will find out. I was being conservative with the rent, it will be closer to $1600+ considering it is one of the bigger remolded homes in the area.

I'm going to try out the Rental Property Calculater BP Provides to assist as well.

Thank again!

Drew Castleberry · Answer

As for refinancing, if the appraisal comes back at $180k, an 80% LTV is only at $144k, and then assume closing costs are $4k, you'd only be looking to cash out $4k, it's not a lot, but it's better than nothing. In any case, you'll be able to get rid of the mortgage insurance which is huge.

Assuming you refinance for $140k and conservatively @ 4.5%, you can drop your payment down to $674. You would be saving just over $200 a month in your payment alone which is huge! I think you could probably get your insurance a little lower and I don't know what shortage is, but your tenants should be responsible for lawn care.

What is the "other tax" for? Property taxes in Texas are generally higher than most states due to not having a state income tax.

Assuming $1,400 rent, if you manage it yourself, you would have a NOI of roughly $950, so after your mortgage payment you would clear about $280 a month. Then you have to set up your reserve accounts. I generally  use 15%, some use less, some use more. But at 15% you'd be looking at on $70 in cash flow. To me that's not near enough spread, but if you can get $1.5-1.6k in rent, then you could make it work as long as the property is in good shape and won't need any capex in the near future.

You can go deeper into it and more specific but that's just a quick analysis. There are plenty of resources here on BP that can walk you through it.

A quick and easy way to do an analysis, take 50% of the rent ($1.4k *.5 = $700) for all expenses and then what's left over is what you have to cover your mortgage. Looking at it this way is pretty close to what we did above, you'd only be looking at minimal cash flow.

The big thing you need to figure out is what the actual market rent rate is. If it's $1.6k or more I'd go for it, but anything less makes it pretty iffy for me.

Keith Rowel · Answer

@Drew Castleberry

Thanks great feedback! I'm not sure about the tax increase yet but here is current information I can provide.

Current Loan Balance: 136K

Current Appraisal Est: 180K

Rental Est: $1400 -$1600

Current Monthly

P&I: 816.47, Home Insurance: $166, MIP Insurance: $63, County Tax: $78.45, Other Tax: $200.02, Shortage: $21.74, Lawn Care: $100.

If there is anything else that would help let me know.

Drew Castleberry · Answer

Two more things that I forgot to include in my other response. If you refinance as owner-occupant, just about every loan I know of says that you need to occupy it for a year. Obviously if you end up having to move 50+ miles for work or some health/family situation there are exceptions, just don't plan on refinancing then moving out the next week. There are more knowledgeable people on BP than I am on this, if you do a search you can find more details.

As for getting your fiance's mom's house, make sure you talk to a real estate tax attorney/accountant. There can be some major tax implications depending upon how you do it. Again, you can also search BP for more details as well.

Drew Castleberry · Answer

Keith - first thing you need to do an analysis on the property, see how much it can rent for, PM fees and how much your taxes and insurance will increase to (if at all) when you switch it to a non-primary residence. In my county, property taxes almost triple! Remember you need to also account for maintenance & repairs, vacancy and capex reserves.

Here's the Fannie Mae guidelines for loans.

https://www.fanniemae.com/content/eligibility_info...

To do a cash out refinance you can do 80% LTV. The value is based off of a new appraisal that the bank will order when you refinance. Consider what your payments would be if you were to just refinance @ 60% LTV, 70% LTV and 80% LTV. Obviously 80% gives you the most money in your pocket, but refinancing only your current balance will give you more cash flow. 70% or somewhere in between will give you a balance between the 2. Play with the numbers and see what you're most comfortable with. I would highly recommend not cashing out the max at 80% if it will leave you cash flowing less than $200 a month after you take into account all expenses, mortgage payment and maintenance/vacancy reserves.

When I analyze properties, I want to cash flow at least $200 for SFH.

If you do it right, you can set up your portfolio with a great performing property for years to come.

If you post some more information on the property we can help out with the analysis more. How much the current loan balance is, what you think it'd appraise at, what it'll rent for, etc.

Keith Rowel · Answer

Elizabeth,

Thank you for tha informartion I did not know it would require that much down.

Elizabeth Colegrove · Answer

There are multiple ways to get reserves.

*use retirement funds

*be added to someone else accounts for a the closing

As for your ideas we are doing cash out refinance and it is based on the appraisal. The thing that we found was it required 25% down. So keep that in mind when you are figuring out how much you can take out.