Using a home equity loan to buy another home: Good or Bad Idea?

Question

I live in New Jersey and have had my condo on the market for a few years now, off and on. I do still live in it. It's not selling because I am also in an affordable housing program with the township and can only sell my condo to other approved applicants according to township rules. Plenty of people want my condo but don't meet the Township requirements to buy. I also need the equity for a down payment towards a new home. But there is a possibility I may be able to rent my condo.

I have a bit of equity in this condo so my thoughts are to take out a home equity loan on this place and use the money as a down payment on a new home, then rent out my current condo to cover the cost of my existing monthly mortgage and the new equity loan together. So i would now have a new home and a rental property. I wouldn't make profit off the rental until the mortgage and equity loan is paid off, but it finally gets me out of the condo and will build up more equity And rental income overtime.

Can someone help me spot the "unforseen" issues and holes in my plan and recommendations on what I should do? Or is this even a good idea?

Justin Fraser · Answer

Hi @Shamar Armstrong you should use the Rental Property Calculator (under Tools at the top of this site). Using the calculator you can plug in the expected rent, maintenance, HOA fees, capital expenditures, mortgage, taxes, and other costs to see how the condo will perform when rented. This should help you make your decision.

Shamar Armstrong · Answer

thanks Patrick and Greg. These are excellent points. I didn't factor in any maintenance work. This is definitely a decision to sleep on.

Thomas S. · Answer

It is not a good plan if you are not making any profit off of renting the condo. Most inexperienced investors sorely underestimate the costs of maintaining a rental property and end up putting their own money in every month to supplement.

My guess is if you think the rent will only cover your costs to carry the property you will have negative cash flow.

Patrick Liska · Answer

Shamar,

that sounds like a good plan, the only thing that may be a drawback is how the bank may look at it, if you are not making enough in the rental to cover the mortgage and equity loan ( maybe see if its worth refinance the mortgage and pull equity out, under one mortgage payment, if rate is cheaper). you would have to make enough in their eyes to cover your new mortgage plus be able to carry part of the condo if you do not have a tenant. But it won't hurt for you to talk the Bank and see if you would qualify, just explain to them what you want to do and go in with all your financials ready for them ( tax returns, banking & investment accounts, breakdown of your net worth) this will only help you.