Good morning experts,
I have been reading like crazy on here, reading books recommended here, doing a little networking in my area, and am building my team. My question concerns what money to use to buy the first house. First I'll explain a little about what I want to buy, then I'll outline what I think my choices are for paying for it.
The Goal:
We are 42. My goal is to quit a full-time salaried job by the time I am 52. My spouse loves her job and does not want to quit, but would like the options that financial independence offers.
The Market:
In my area a 3-bedroom, 1-bath house in a solid working-class to middle-class neighborhood rents for $800/month. Using the 2% rule, I would have to have a mortgage of not more than $40,000. Using the 50% rule, I would have $400/month left after expenses to pay for the note and to provide cash flow. There are a plethora of houses on the market to pick right from the MLS that meet these requirements. I expect that I would have to spend $5 - 10,000 on fixing them up to prepare them for renting (I plan to hire this work out, as my spouse and I have full-time professional jobs and a 7-year-old daughter).
The Financing:
My spouse and I have no debt other than the $10,000 we have left to pay on our house, which is worth a minimum of $120,000. Our various retirement accounts already have enough in them that, even if we didn't put any more in, we would have enough for retirement at 65 (we are 42), but we plan to continue to contribute at least enough to get the employer matches for our 401ks. We have an emergency fund to pay for at least 8 months of expenses. We have started savings funds for capital improvements to our home and for a new car (our current cars are 7 and 10 years old, but in great shape and low mileage). We have $20k saved for our daughter's college education, and contribute $200/month into her 529 plan. We both have FICO scores above 800. Together we have Roth IRAs we could pull $12,200 out of without taxes or penalties. We plan to use this for a down payment.
The Choices:
I went to visit the large bank where we have been customers for 15 years and have a "preferred" account, and the loan officer, while friendly and helpful, told me they rarely do financing for rentals any more, and he recommended that we get a line of credit on our existing home as the interest rate will be only 3 to 3 1/2 percent. After we own the rental for a year and it has seasoned we could finance it with a mortgage and pay off the line of credit on our home. I am very hesitant to do this, as our original goal was to pay off our home in two years (now four years since we decided to send our daughter to private school). I have read on here that smaller local banks are still doing loans for rentals, but the interest rate would be considerably higher.
What should we do? Keep looking for financing on the rental? Tap the equity in our house? Save up until we have the full purchase price in cash?
Your help is greatly appreciated!
