Suggest a Funding / Timing Strategy for my Situation

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Suggest a Funding / Timing Strategy for my Situation

P M
Real Estate Investor · NC · Member since 2008 · 22 posts · 2 votes

Greetings- here's my situation.

I live in a townhouse with a tremendous location in a college town. I am about to refinance it from 6.875% down to 4.875% and cut my monthly payment by over $200.

Then I would like to buy another house down the street, move into it as our primary residence, and rent out the townhouse.

Here's our dilemma: we need to figure out how to get through the transaction. On the other side of the purchase of the second house, we save enough income each month to cover the two mortgages even if we don't rent the townhouse.

Some details:

Townhouse- when refi'ed, will be $120k loan, 30-yr fixed, at 4.875%, monthly payment P+I = $635.05
Townhouse monthly taxes = $155
Townhouse monthly insurance = $21
HOA Dues = $120
Prop Mgmt Fee = $85

Monthly rent = $850

Desired New Home

Likely purchase price = $260,000
Mortgage rate 5.1% (???) for 30-yr fixed
P+I = $1,222
Taxes = $374/month
No HOA

I have $16,000 in liquid assets right now. I will likely liquidate $2700 on the townhouse refi, bringing me down to $13,300. I don't want to be completely devoid of cash- maybe I'd use $10,000 of this money?

I could also theoretically get a HELOC from my credit union up to 90% LTV of the townhouse. This would get me about another $10-12,000. However, the second house will probably require close to $30k in closing costs and down payment even if I get a 90% LTV on the house.

How would you find an extra $10-15k to get through the transaction period?

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y

A rental that gets $850 a month in rent with a $635 P&I payment is a terrible rental. Read in the Rental Property forum about the real expenses, aka the "50% rule".

Rent: $850
Expenses: $425
NOI: $425
Payment $635
Monthly loss: $210

Just the expenses you list amount to $381, and you're sure to have maintenance (mostly caused by your tenants) and vacancy.

Why in the world do you want to keep this as a rental? If you want a new house, sell this albatross.

If you buy a new house, you should count on at least 10% down. So, that's $26K you'll need.

Doesn't sound to me like you're in a good position to buy this new house, to be honest. The new lender will make you qualify for both loans, and will not include the rental income to compute your DTI. You can only use that after its been a rental two years.

If you want to buy this new house, sell the townhouse and roll the equity into the new one. Sounds like its worth about $145K, which I assume you mean that's what you could sell it for today. You'll pay between 8% and 10% to sell it, depending on what seller concessions are required. I think you currently have a $115K balance on the townhouse, since there will be costs to do the refi and you say the new loan will be $120K. So, if you sell for $145K, net $130K after costs, and pay off your $115K loan, you'll have $15K, less taxes. Should be none, assuming you've been there at least two years. Between that and the cash you have, you have enough to buy the new house. Barely. But if you could really afford both loans, save the money you would be losing on the rental and you'll have some cash soon.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    A rental that gets $850 a month in rent with a $635 P&I payment is a terrible rental. Read in the Rental Property forum about the real expenses, aka the "50% rule".

    Rent: $850
    Expenses: $425
    NOI: $425
    Payment $635
    Monthly loss: $210

    Just the expenses you list amount to $381, and you're sure to have maintenance (mostly caused by your tenants) and vacancy.

    Why in the world do you want to keep this as a rental? If you want a new house, sell this albatross.

    If you buy a new house, you should count on at least 10% down. So, that's $26K you'll need.

    Doesn't sound to me like you're in a good position to buy this new house, to be honest. The new lender will make you qualify for both loans, and will not include the rental income to compute your DTI. You can only use that after its been a rental two years.

    If you want to buy this new house, sell the townhouse and roll the equity into the new one. Sounds like its worth about $145K, which I assume you mean that's what you could sell it for today. You'll pay between 8% and 10% to sell it, depending on what seller concessions are required. I think you currently have a $115K balance on the townhouse, since there will be costs to do the refi and you say the new loan will be $120K. So, if you sell for $145K, net $130K after costs, and pay off your $115K loan, you'll have $15K, less taxes. Should be none, assuming you've been there at least two years. Between that and the cash you have, you have enough to buy the new house. Barely. But if you could really afford both loans, save the money you would be losing on the rental and you'll have some cash soon.

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  • P M
    OP
    Real Estate Investor · NC · Member since 2008 · 22 posts · 2 votes
    17y

    Jon, I appreciate your warning on the 50% rule. I have a better handle on the expenses than that and I estimate the monthly loss at $93, not $210. Why is this monthly loss worth taking here?

    I know my market well, and the townhouse in question is in one of the best locations in town. I have spoken with realtors with MLS access, as well as done my own sales price research at town hall in transaction data, and the appreciation rate for the townhouse development is the best in about a 20-mile area. The town political class is enraptured by NIMBYs and extreme environmentalists who believe in building NOTHING, anywhere, at anytime, so the ability for new housing to be built to compete with this location is all but cut off.

    In short, I am confident I can bank about $8000 in net worth gain annually through appreciation/loan payments for the price of about $93/month in cash losses.

    I know that cash flow is a key mantra here, and with good reason. But even if you're skeptical, humor me for a moment.

    If I:

    1. Refi the townhouse down to a 635 payment.
    2. Get a HELOC for $15k
    3. Apply for a $10k, 3-year loan from lendingclub.com

    then am I going to hit a wall when I apply for the loan on the second house?

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  • Ralph S.
    Real Estate Investor · Sacramento, CA · Member since 2008 · 566 posts · 356 votes
    17y

    I've witnessed this. Over time, economic stagnation leads to depressing RE values.
    Politico's who want "our town to never change," don't want to grow or develop "because of the crime rate we'd get" or other mantra, seem to think they can make time stand still. Instead, opportunity (and investment) elsewhere pulls investment out of the community.

    Racine, WI did this a decade or two ago. Just my 2c.

    1Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    You say:



    In your first post, you list these numbers:

    monthly payment P+I = $635.05
    Townhouse monthly taxes = $155
    Townhouse monthly insurance = $21
    HOA Dues = $120
    Prop Mgmt Fee = $85

    Monthly rent = $850

    Those expenses add up to $381 right there. Even if you allocate 10% of rent for maintenance and expenses together (you WILL have both maintenance and vacancies, guaranteed) that's another $85 and you're now at $466. With the $850 rent, that leaves you NOI of $384. With the $635 payment, your in the hole $251. I don't see how you get to a $93 loss. I'm using your numbers here, plus the two very real expenses you've overlooked. I would also guess that property manager you're going to use will charge you between half a month and a months rent to fill a vacancy.

    I understand your argument. This is a speculative play. That's all well and good. Lots of people have gotten very rich with real estate speculation. Lots of people have also gotten very broke. You need some financial stability to play that game. You're trying to scrape up money to buy another place. You're going to go to lendingclub to borrow money. That seems like a desperate move. This doesn't seem like the kind of financial stability needed to be speculating on real estate.

    I'd speak with a few mortgage brokers about the specifics of your situation before going down this road. All those new loans (new first, new HELOC, lending club loan) will hit your credit. The rental income will be ignored for the new loan. Whether or not you can still qualify for a new mortgage is going to depend on your credit rating after these hits, your income, and your other debt. If you're in the high 700's now, and your DTI with the mortgage for the new place is 35%, you should have no problem. If you're in the low 700's now, and your DTI will be 45% with the additional property, you'll have a hard time getting that loan. But those are just my guesses. Speak with a mortgage broker or three.

    2Reply
  • James Hiddle
    Altus, OK · Member since 2008 · 2k+ posts · 690 votes
    17y

    Speculation these days is futile I wouldn't invest based on speculation period.

    0Reply
  • P M
    OP
    Real Estate Investor · NC · Member since 2008 · 22 posts · 2 votes
    17y

    Just checking back in- thanks to all who provided their advice on this thread, particularly Jon. We have decided to sell the condo and put an offer on the house.

    I still think the case is strong for appreciation in our area, but when Jon described my idea to get money at Lending Club as desperate, I found myself agreeing.

    Part of my frustration is that I want to get started in REI without leaving town (we really like living here) but cashflow is mostly non-existent.

    What I will most likely do is (assuming we successfully buy the house) look at our cash situation 6 months after the sale/move, and if our balance sheet is strong enough, pursue a lower cost property ($80k or less) in the less desirable part of town which is more likely to have positive cash flow, though little chance of appreciating.

    That way, if I start small with a modest positive cash flow basis, I can build up cash reserves to cover future vacancy periods and repairs, and eventually move on to the more appreciation-oriented type of moves I was previously contemplating when we have a bigger cash cushion and a rental property throwing off cash.

    Again, thanks for telling me what I wasn't ready to hear at first.

    1Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    Thanks for the update. I always appreciate a followup like that. You plan seems much sounder than the original plan. Keep in mind the goal of real estate investing is to make money. That's not always possible in every location. You might have to look a bit further afield. Lower income areas, or perhaps in some nearby town.

    Good luck. I think you're making a wise decision.

    1Reply
  • P M
    OP
    Real Estate Investor · NC · Member since 2008 · 22 posts · 2 votes
    16y

    A final note from this thread, mostly for Jon, who may be monitoring it.

    In July, we bought the house and moved in with a bridge loan from a family member to help us with the down payment. Yesterday, we sold off the condo at $20,000 over what we paid for it in 2006. When all the transaction cost dust settled, we netted about $12,000 in profit. plus our equity. We will pay the family member back at about 75-80% of their loan, and then complete the payoff over the next several months.

    In the meantime, I have begun a personal research project on a promising neighborhood that I have mentioned in another thread. I will start geocoding rents and sales prices of homes where I can find the data, and build a "heat map" of the local market while saving some money to invest.

    My target purchase there will be under $70k, and looking for $100 cash flow per door.

    Thanks again to those who gave me the straight talk earlier this year.

    1Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    16y

    Thanks again for following up. Always great to hear of a successful outcome. I suspect few people can say they bought in 2006 and sold now for a profit.

    You might want to check out rentometer.com. They show rents on a map. Their predictions are a bit on the high side, but the maps are pretty cool. Zilpy.com is a similar site.

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