Leveraging High Equity With High Debt/Income Ratio

[Jake Conahan]

Hello Everyone, 

     First of all, thank you for any contribution you may have to my dilemma. I am open to ALL ideas and opinions, as I am green to the R/E investing game and planning for my first investment property with a few months of study under my belt. My question, in a nutshell, "What do I do with the $45,000 (70% of total equity) bestowed upon me by the circumstances of my booming housing market?". Thinking on this topic alone has left me in daily cycles of coming to the same redundant conclusions and objections to all my best plans of action. I will include my few ideas and current data to communicate my situation as clearly as possible.

Personal/General Info -

     My name is Jake C, I'm married with our first child due yesterday, he's a little behind schedule but that's OK. In December 2020 I ended my term of service in the Army, and my wife and I moved back home to Tampa, FL, from Oahu, HI. While I am new to real estate, I like to think I have a decent foundation of knowledge as I am currently pursuing my Bachelor's in Finance at USF and am the proud owner of a laughable online retail LLC attempt that is... alive. Anyway, exactly 12 months ago, my wife and I mortgaged our first condo back home in the booming Bay area market. I didn't know anything about real estate, other than our close family-friends forewarnings that it was a HOT market, and we had to be aggressive if we were going to compete equipped with just my VA home loan. Through a connection of his, we landed a beautiful off-market condo for $148,335. Now, a year later, a replica unit from my complex just sold for $225,000 (To be conservative, I base my calculations on $210,000 est.).

Ultimate Goal: 

Walk away from the transaction with a comfortable home for the family, and a cash-flowing asset that can add at least $300 net monthly income. We are content staying put in the condo and investing in a more ideal cash flowing & appreciating asset. We are also fine with moving out to a small home upgrade (likely rehab), and renting the condo (which would yield about $232 net per month).

Dillema's - 

1) Our debt-to-income ratio is too high to qualify for any conventional loans. However, enough untaxed income is allotted to me via my GI Bill and VA assistance programs, that these investments are numerically logical.

2) My current interest rate on the condo is a low 2.5%. A cash-out refinance right now is estimated to raise me to 5.4% and likely climbing, bringing the condo's estimated net monthly cash flow potential to a whopping $7.50. In which case, we would be staying in the condo and had better be leveraging the $45k on a worthwhile property. 

3) In my local market, I'd be lucky if $45,000 got me a down payment on your average listed SFH fixer-upper. This would leave me with a property, but no additional money to finance rehab, again due to debt/income ratio.

Thoughts:

• 1.
  • Seller-Financing, but I believe this will be very hard to find in my highly competitive market.
• 2. 
  • Hunt for another inexpensive condominium or apartment unit to invest in, likely to produce very low cash flow, but seemingly safe. Single-family home is preferred, however.
• 3. 
  • Sell property in current hot market conditions in anticipation of a gradual cooling down from increased interest rates. Invest profits in a rehab, force equity, and start over with a more valuable single-family home
  • 4.
  • 55+ community condo?? Florida is a magnet for the elderly and the population is only getting older.

Wrap-Up:

The rabbit hole of options when it comes to real estate investments and financing them has tormented my mind for the past few weeks, but I am enjoying every second of it. I hope I organized my thoughts decent enough that everyone can understand. Again, thank you for your time and any help or suggestions you may have.

Investors feel free to get in touch! I am currently pursuing my real estate license, and also building a mailing list daily of distressed properties in great bay area neighborhoods, hopefully to find my future home and potential wholesales.

[Tyler Burks]

Hey @Jake Conahan!

@Zachary Bliss brings up a good option about the HELOC you can use with the equity built up in your condo. You will have to check with a few banks to see how that can get lined up and how much of it you can actually take out to reinvest in another property. Once you figure out how much you can actually take out then you run the numbers backwards to see what your buying power will be.

Since your DTI is a concern for conventional lenders you'll more likely want to look at a 30 Year DSCR loan for your rental property. This takes into account for the properties cashflow vs. PITI and not your DTI ratio. There is also no limit to how many properties you can own with this type of loan as well. You can also umbrella multiple properties under one loan with the DSCR route. Interest rates are higher right now and who knows where they will go and how many rate hikes there will be in the near future. So with that, I would recommend looking at properties that need work so you can enter into them with a an easier to obtain Bridge/Fix and Flip loan so you can force appreciate the property and refi out later into a DSCR loan when interest rates start to stabilize. This method has the possibility for you to put some cash in your pocket when you're done and also have a cash flowing property and then you can continue to reinvest your earnings.