How to use equity from primary home sale?

Question

Hi All - We are "downsizing" our primary residence and will have roughly $500k in cash from the sale once all the RE fees are paid. We are looking to start investing into real estate (Single Family Home BRRRR initially was our though). We will be buying a new primary residence in the roughly $750K range and are eligible to utilize a VA loan so we do not need to put any money down. We are looking to invest in the Seattle market so having higher cash may be required. The two options I am debating are below and hoping for some guidance on the best approach and pros and cons as you see them.

Option 1 - 0% down/Keep all cash for investing - Our primary monthly mortgage payment will be high. Allows us to have all cash available immediately but we will pay alot monthly in mortgage interest due to the 0 down for the entire loan and we will have a high mortgage payment for 30 years on our primary. We can afford it on a monthly basis but it does makes our personal budget tight with little wiggle room to grow any capital that way.

Option 2 - Invest all cash as a down payment so loan is only $250k/Open HELOC at $350k limit to use for investing (assuming 80% LTV) - Our primary home monthly mortgage payment will be very low and allow breathing room in our personal budget. We would still have cash available from the HELOC to use as we need to fund projects (not as much as Opt 1) and will have more monthly cash flow from our full time jobs to continue to build additional capital to use later. Total interest paid over time will likely be less since we can use the HELOC funds over and over and only pay interest when we deploy the cash.

Thanks for your thoughts!

Chris Davidson · Answer

A mixed approach sounds best to me and feel that the numbers will really come down to what will actually work in your market (only works when the seller agrees). I would look at it as is the cost of the capital cheaper than if you were to get a smaller loan and borrow elsewhere for the investing. You can refi the primary later and maybe rates will be better and not worse. One thing not mentioned is if you went 0% down with no value add option on the primary if the market swings the wrong way you could be underwater and not able to refi for a longer period. Best of luck!

Dave Skow · Answer

@Sarah Trout- thanks and good to hear you are pre approved and also that you are exempt from the VA FF ....keep in mind the once the one income ends - getting approved for any future loans will be tied to any pension/ SS / rental / investment income . There are some heloc lenders willing to go higher than a 80% cltv ... revised idea ...put 225K down ( 30% ) and have 275K cash left over and some immediate equity room for a HELOC ...in the Seattle marketplace - some sellers may shy from a VA offer if comparing it to a cash or conventional loan offer...this is because of the perceived stringent VA appraisal process that really doesnt exist and also because with a VA loan - a seller is required to pay for some of the buyers fees which lowers the sellers proceeds ....if a VA offer is made on a proeprty thats been on the market for awhile - this likely wont be an issue

Sarah Trout · Answer

Hi! Thanks for your reply. Let me add some more details that might help with our specific situation.- We are exempt from the VA funding fee- We are pre-approved for much more then $750k. S750k is what I am comfortable buying for our primary residence as we are planning to live off of one income. Eventually we want my partner to stop working the corp 9-5 and move into RE investing full time. This sets us up for an easy transition when the time is right and gets our expenses under control now. My only concern with splitting the two is I don't think I can get a HELOC putting $150k down. Most HELOCs from my research require an 80% LTV and $150k is exactly 20%. So while it does keep cash available right away, the trade off is the mortgage cost per month. $150k down lowers my mortgage cost ~$900/month, if I put $500k down, it limits it by over $3k/month and we may much less interest on the length of loan. Also if anyone has good advice on how to utilize the VA loan for investing I would love to read creative ways to utilize the benefit. I could see buying a small multi family could work well for a VA loan but not sure if there are any other creative ways to use the benefits.

Steve Vaughan · Answer

I'd put money down if my new mortgage rate is above risk-free plus 2%. Risk-free money markets are paying low 4%. If my new mortgage is above low 6%, I'm putting money down. Having cash available has value if you are actively scouring so closing quickly nets large discounts and saves you from having to get mortgage 1 on a solid brrrr. We personally have only a heloc on our home so obviously agree with that strategy. I've been enjoying the risk free couch returns in this market but would rather have a 2% premium . What will your VA rate be with different down payments @Sarah Trout ?

Dave Skow · Answer

Thanks ..fyi .if you use your VA eligibility – ...you will have to pay a VA funding fee unless you are exempt ..the VA funding fee can be rolled into the loan .....I would recommend a combination of the 2 approaches ...eg. putting 20% down ( 150k ) keeping 350 freed up to use ...you could also get a new HELOC on the new home on this scenario if needed ......I would recommend looking at the various real scenarios as you locate properties you are interested in ....I also recommend getting pre approved as the 700-900K price range is competitive

Carlos Ptriawan · Answer

I am little bit confused actually, so do you want to buy primary from the flips ? how long you want to keep it ?Best thing is if you cash for BRRR, you don't need HELOC, you could use secured-loan with the cash as the pledge, interest rate is only 2-2.5%.VA loan makes sense when you do house hack.Best strategy is actually how are you going to evaluate the money cost , and second, tax.