Is this possible? How can he make it work?

Question

I had a great conversation with a gentleman this morning and I'd like to relay his story to see what y'all would suggest he do.

Bought a 3 bed 2 bath 1500 square foot Ranch with good proximity to downtown 6 years ago for $200,000. Current amount owed on the mortgage is about  $170,000. Total monthly carrying cost for the property is about $1,700.

The gentleman would like to move his young daughter to a better school in a year or two. The neighborhoods he has in mind cost about about $450,000 to $500,000.  He doesn't have a down payment saved. He would love to keep the current house as a rental.

At the peak this summer, his current neighborhood was selling homes at $375,000 to $450,000. Rents were $1600-$1850.

How would you game play this to achieve his goals?  Can he get his daughter to the good schools in 1-2 years and keep the current house as a rental without substantially increasing his monthly expenditures?

Kris Wong · Answer

Sell his current house. Take his $200K in equity (gains) tax free, and invest that into cash flowing rentals, or an apartment syndication deal. Rent in his desired neighborhood.

Here's some motivation: https://www.goodegginvestments.com/blog/buy-or-invest-200k.

Stephen Stokes · Answer

1st step would be to order a desk appraisal to understand the approximate equity in the home. If sufficient equity, next step would be to do an owner occupied cash out refinance leaving only 20% equity in the home under the new loan. Next, shop for the new home and depending on the down payment you have at the time, apply for either conventional or FHA owner occupied home loan for the new purchase. Note; you likely need to wait 6 months between the cash-out refi and closing on the new home. Once secured loan pre-approval and under contract for new home purchase, lease out the existing home. Suggest to vet the market on rentals in advance as well so you know what you can achieve. Talk to local agents on how fast they are renting and what attainable market rent will be. This can also be done by calling shops like Renter's Warehouse to get their free rent estimate without obligation to hire.  Once you have a qualified tenant, sign the lease and provide it to the lender for the new home purchase before closing along with proof of deposit. Last step to close on the new home and move your stuff in. Done

Jarrod Weaver · Answer

I'm with @Kris Wong and @Edward Liu. Sell the asset and use the proceeds to buy a new residence in the desired district. Reallocate the surplus into an investment property that actually cash-flows.

Brian Bistolfo · Answer

Just chiming in to say that a large group of the most active multifamily investors in Austin met up and discussed the article mentioned above:

https://www.goodegginvestments.com/blog/buy-or-inv...

...and came away saying that, yes, it's useful to think about the buy-your-home vs. invest-the-same-amount-in-multifamily-syndication . You always want to analyze that tradeoff. But the scenarios and numbers on the multifamily side are grossly oversimplified and overly optimisic. If you are part of a GREAT apartment deal these days, you are probably looking at 6-9% yearly cashflow and an 80% total ROI after the property exits in 5-7 years. Doubling your money every 8-9 years. Very healthy.Advertising to beginners that they're going to have their money invested in great deals 100% of the time, and that those deals are going to double your money in 5 years, brings a lot of unrealistic expectations to the multifamily space that end up funding bad deals and damaging the industry as a whole. So, caveat emptor.

Zachary Barton · Answer

The good news is there’s enough equity in the property to do a cash out Refi and pull out the 110k you would need to close on the new home. 110k = 20% + 10k CC.

The bad news is that would put the total mortgage amount at around 285k with a PITI of roughly $2250/month.

But here are a couple important questions that could change the equation.

Does he currently live in the home?

Does he have to purchase the property for his daughter or can it be in her name?

Is $1800 his PITI or does that include any landlord fees like repairs, capex, or managment?

Andrew B. · Answer

Short answer is no, the house wont make a good investment. He should fix it up and sell. In addition, if he makes it an investment he loses the ability to avoid taxes on his $150k gain at sale. that's an instant loss of about $30k.

Edward Liu · Answer

Not clear of motivation of the person who wants to keep current house.  Based on cash flow, his current house would not be a good rental.

Step 1 Sell existing house and get the necessary equity.

Step 2 has 2 options:

a) Buy house in area with good school

b) Buy rentals in cash flow areas, rent in the area with good school

2a is option for average Joe.  2b is for someone who get out of the rat race.

Technically he has a 3rd option, refinance existing loan, take out equity and buy another house in desired area and rent out the existing house.  I would not advise this option as he would have too much mortgage (or baggage).  Sure hope he has very stable income since this current house will keep on sucking money (blood) from him.  This could be formula for bankruptcy if there is a bad recession.

Thomas S. · Answer

Present home would have significant negative cash flow and should be sold to access the equity to buy a new home.

Problem is that his desire to move for school is a poor investment decision unless he can make a lateral move cost wise.

Kris Wong · Answer

@Stephen Stokes while you are correct, based on the numbers included in the OP, this property would not cash flow. And that's even if he were to manage himself, which I would never do personally.

Stephen Stokes · Answer

@Kris Wong I would advocate the same except you can also keep earning additional equity and possibly cash flow by keeping the house for another 3 years after living it in then sell. At that point they will still have 2 of the last 5 years as primary residence so they would still qualify the tax free additional equity gained over next 3 years (assuming the tenants rent covers mortgage and home values do not decline in the area).

Is this possible? How can he make it work?

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