How to make equity in personal home work for us

Question

Hello bp and thanks for any help in thinking/talking through the options. We purchased a 3/2 sf home in Washington 4 years ago with a va loan at 3.25% for 189k, total of 193k including costs. Now owe about 177k and can sell for about 240k or rent for 1500/month. Monthly PITI is currently 1137/mo. We'd love our current home to become our first rental property and are willing to occupy our next investment property while rehabbing it. How do we make the numbers work best? Refinance our loan? We won't get 3.25% interest again because rates are higher now, right? Our credit is excellent, military pay is nice and stable, so we should qualify for a competitive rate I believe. What else do we need to consider? What's the best way to use the equity in our home to move forward? Is refinancing our current mortgage a good idea? Thanks again,

Kristin

Account Closed · Answer

@Kristin Romine From what you've described, you may want to consider doing a VA cash out at 100% of the appraised value of your home.  Rates are slightly higher than where you are currently, but they are still low (in the 3's).  You could then put that money away in the bank, and when you're ready to purchase the investment property, you now have funds for a down payment and/or to rehab.  Feel free to PM me if you need any help!

Aaron Gould · Answer

Hey Kristin - I also think 1500 in rental income doesnt give you enough room with your PITI at 1150. Even if you managed the property yourself and payed yourself a property management fee, the numbers are tight.  Vacancy rate is at about 3% in Bremerton right now, meaning you would want to stash $45 a month for it, approximately 100 for maintenance and repairs, and another 75 for capex. Conservatively, that puts your operating expenses at around 1360 (assuming tenants pay for all utilities). The biggest problem becomes what happens when you do have to add property management into the equation, youre not even breaking even. If you two got stationed somewhere else, it would be a difficult situation to get out of. I think your best bet is to shop re-fi rates for a cash out like Burke suggested. Take advantage of you two buying at the perfect time and use the money to find a property that WILL cash flow the way you want it to! Good luck!

Kristin Romine · Answer

thank you all for your thoughtful answers. I've got lots to learn and I appreciate the help! In my situation, would you sell the current home for $240k and take the profit to the next property, instead of tying up debt to income if this isn't the right place to hold as a rental? No room for an addition and no basement. We didn't buy 4 years ago with investment property in our plans and are willing to sell and occupy the next place if that's a smarter plan. A cash out option is also appealing since we'd be able to remain in our home instead... Hmmm. Who do you folks bounce these specific ideas off of? Your realtors, financial advisors, fellow investors? Who has our best interest in mind and what would you do?

Thomas S. · Answer

Your present property valued at $240K with a potential rental income of only $1500/month is a very poor choice as a rental income property. My advice would be, if you can get a permit for a secondary suite in the basement that will rent for at least $600/month, build and rent that first. Then when ready move out and rent the main house. unless you can get over $2000/month for the property it is not a good investment.

Robert Guilfoyle · Answer

@Kristin Romine being in the military, you can use Andrews Federal Credit Union who will give you a HELOC on 95% LTV - you will have to pay for an appraisal unless you have had one completed in the last year.  I just applied for one this weekend.  Waiting to hear back from them...

Hank A. · Answer

Find out what interest rate you can get for a maximum cash out refinance. Do the numbers with that interest rate. If your returns with a rent of $1500 pm are better than the new interest rate, then I'd say go for it. Use the cash to further your RE business. All the best.