Should I use the equity in my current home to purchase another!

Question

I purchased my home with a conventional loan, 3% down payment. There’s roughly $30k in equity in the home. The wife and I are looking for a bigger home but want to keep and rent out our current home. Should we use the equity in our current home to purchase another home if it’s a 10-20% down payment? Any tips on where to go from here when starting this real estate journey?

Will Fraser · Answer

You are correct about what I shared :)

I want to chip in another 2 cents from my journey on this road . . . I'd encourage you to dig deeper on your "why."  It is intuitive and on the face of it passive income is the goal . . .  (though arguments could be had about how passive real estate direct ownership is, but that's for a different day) . . . passive income is not a compelling "why", not compelling enough for the dark days.  It IS what you want, but WHY do you want to replace your current income?  What would you do after having replaced that?  Why is that valuable to you?  Specifically, why is that MORE valuable to you than what you do right now day to day?

That's the drilling down that I've seen needed in my own life.  Drill as deep as your can and see what you strike :)

Matthew Hunter · Answer

@Will Fraser

If I understand correctly. Instead of using the equity in my current home to purchase a new home, you would save up and purchase a new home at a low down payment (maybe 3%). Then you would use the equity in the current home (HELOC) to purchase an investment property. Essentially, we would be in a new home with 2 rental properties. Correct?

Thank you for your advise by the way. I will take this information and do lots more research and planning before making a move, but I have to say, it’s sounds like a plan!

My why is to create passive income in addition to my current income and to one day replace my current income.

Will Fraser · Answer

Right on, Matthew!  That's a solid situation for sure.  I think a LOT of the specifics in real estate come down to your personal situation and goals.  For example, how I would be inclined to play this would be:

• Get a HELOC on current home at the highest LTV% possible. 
• Buy a new home using as low-down-payment of an option as possible, fixed rate for 30%.  Must have investment potential either now or after I move out.
• Use the HELOC to fund a down payment on a separate investment home.  Must cashflow, and ideally this could also occur on a 30-year fixed-rate loan.

This seems good and right to me, but that's only because it fits my personal goals and motives in real estate.  I'm wanting to safely grow my total investments while using fixed-rate debt to safeguard against inflation.  Said simpler, I don't want my rates to spike just because we're printing $$s like there is no tomorrow.

For you, though, maybe the risk associated with 2 rental units compared to having your primary home and one rental seems nuts.  I wouldn't recommend losing regular sleep at night over real estate -- there are lower stress ways to go.

So, drill down deep and find your Big Why behind investing and then think about how your upcoming move can put you closer to that.

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Matthew Hunter · Answer

Hi, @Will Fraser

I have owned the home for 2 years now and refinanced a few months ago. The mortgage is $716 but the homes around here rent anywhere from $110-$1250/mo. I bought my home at $120k and it’s currently valued at $141k. I’ve had two real estate agents perform a market analysis and projected my home to be worth $155k-$165k.

I am still trying to figure this real estate game out. My plan was to take the equity out of the home to purchase a new home, but only a home that I could put 20% down. The current home would now become a rental. We would live in the new home but it would also be an investment property. Do you see what I’m envisioning or could this method be flawed in your opinion?

Will Fraser · Answer

Hi @Matthew Hunter, in general redeploying equity that has built up in a home is a good and efficient idea, but you want to check a few key details first:

• Do you have access to the equity in your current home?  Depending on what % of the total value your equity is, you may or may not have access to it, and if you do it is unlikely you'll be able to access all $30k.  The banks will not likely go up to 100% loan to value on the cash-out refinance, or even a HELOC.  So, perhaps some but probably not all.
• If you used the equity from your current home to purchase a new home, would your current home perform adequately as a rental property, covering all costs, vacancy, and repairs?

You don't want to get into a situation where you drain the equity and create a situation that doesn't return financially, but that will purely come down to your individual investment goals and your numbers.

I hope this is useful to you!