All Forum Posts by: Mike Lettko

Quote from @Jon Kelly:

@Mike Lettko Your head is spinning now. Slow down. You're in a great position and really can't go wrong. You have 3 options in the near-term: (1) Sell your home and roll equity into your new home, (2) Rent your current home, (3) Sell your home and keep proceeds in savings / invest (we'll consider options for this money later)... 

(1) Roll equity into new home - This is the safest play. This comes down to the age old question, "Should I pay down my mortgage or invest my money elsewhere?" This is a personal choice. However, if you're borrowing money very cheap at 3.5% on your new home why would you want to pay it off faster? Can you earn more than 3.5% if you put your money somewhere else? Most likely. 

(2) Rent your current home - Decent option. Gets you into the real estate investing game and may produce a little bit of monthly cash flow. However, I would encourage you to run the numbers on your current home as a rental. Rent is 0.6% of purchase price... it doesn't come close to the 1% rule. The good thing is you know the property intimately and are aware of upcoming repairs. After expenses and reserves for vacancy, repairs and CAPEX I assume your cashflow will be minimal...
(3) Sell your home and keep proceeds in savings / invest - This is my favorite option. This is the real estate investors dream. You worked your butt off to pay down your mortgage, got a little lucky with appreciation due to market timing, and now have $235k+ in built up equity. Let's assume closing costs on the sale are 10% ($35k). You will walk away with $200k after the sale ($350k - $115k - $35k). Assuming 25% down on investment property(ies) you can buy up to $800k worth of real estate investment property(ies). This is your chance to get into the game. You're in a great market and I'm sure you can find plenty of options near you. Take the plunge. 

 Jon, Thank you. You are spot on with your opening statement there. I'm feeling the time pressure, and don't want to look back and wish I had approached this differently. I really appreciate you taking the time to provide this information and insight. 

My struggle with renting (option 2) is it seems that the cash-flow is almost negated by the fact my new home mortgage is higher as a result of not paying the larger down payment. But I'm not sure this is the right way to look at it. Also, with the 1% rule you mention, should that be looked at from the current market value, or from the price I paid, or owe? On the plus side, most of the big ticket repairs on this house have been completed, and recently.

Option 3 sounds like a great path that I haven't been considering. Definitely something to factor in. Thank you again!

Quote from @Canesha Edwards:

@Mike Lettko

Hey Mike-

Here’s my 2 cents.

If your current home is under contract, how long do you have to decide whether you want to sell or not?

Secondly, if you’re looking to break into real estate investment, consider this strategy.

Since your current property has so much equity, why not refinance? I would see if a lender would refi the property at 65-75% of the appraised value (which I’m assuming to be $350k). I like to leave a decent amount of equity on the table as a buffer should the market take a downward turn. Take the proceeds from the refi and roll that into your next property and rent the current property. I would reach out to a lender to get a general idea of what the new monthly payment would be after refi so you can analyze the potential of your current property as a rental.

Hope this helps.

Best,

Canesha

 Thanks Canesha, I appreciate the reply. I haven't really run the numbers with a refi in mind, so I'll check that out. I was mainly focused on leaving the old home loan as-is, since it is a decent rate, low payment, and I assumed would create the most cashflow. But its definitely worth taking a look at. Thank you!

Quote from @Jake Wiley:

@Mike Lettko - Really depends on what your goal is here.    Are you looking for cashflow?   Are you looking for equity?

One thing to consider is that you don't have to close with 20% down. You can still work with your lender on an FHA loan or another alternative. It would likely just void your financing contingency, meaning if you changed the loan type to a 3-5% down the type of loan and for some reason you didn't close due to financing, you could lose your earnest money. As long as you close, cash is cash to the seller. I've closed many single family properties that I had no financing contingency with loans to make the offer more competitive. So... there's one thing for you.

One thing to consider is that you are selling your primary home and have had it for more than 2 years as a single person you have a $250k gain exemption from taxes, as long as you were in it for 2 of the last 5 years I believe. So if you start renting it out you could lose that option after the three-year mark. The benefit to selling is to then take the gain tax-free and plunk it down on a new property. You have around $200k to use as down payments on properties, which at 20% down is about $1.0M worth of properties. If you can do an FHA-type loan on your primary, you will then have around $175k to put down on investment properties. If you can find some good rental properties that will not impact your DTI ratio (generally speaking this is the case when rents multiplied by 75% covers your PITI) then that $175 could lever up to 875k in rental properties which is really strong.

Hopefully, that is helpful and good luck!  

Jake

Jake, thanks so much for the reply and insight. There is a lot of value here for me, and some new things to consider. The information regarding the down payment is especially helpful, as it creates some flexibility. I appreciate it!

Looking for some opinions on what the best approach may be in this situation. I decided to sell my first home, and buy a new home, feeling like the market isn't terrible as a buyer if you are also selling. Under contract for the new home at 410k, 20% down. My current home is under contract to sell for 350k. I owe 115k for 22 more years. I planned to roll all proceeds from the sale of the current home into the new home. Then I started to consider renting it, and it has sent me into what seems like a never-ending path of possibilities. I want to get started in real estate investing, and this seems like an opportunity. Rent in the area for my house is 2100 easily. Mortgage with escrow is about 1200. 

I'd love to use this as my opportunity to get started with a rental property. My doubt begins because I originally only considered buying a new house knowing I was selling and cashing in on the sale, and keeping my new mortgage low by rolling all the proceeds in. Further, the 20% down wasn't necessary, but helped us be competitive with our offer. If we aren't selling, the 20% down needs to be pulled from savings/investments I am hesitant to touch, but will if it's worth it. 

I know there are a lot of intricacies that are absent here, but any thoughts or insights would be helpful. I've been calculating this every which way I can for the last week, and haven't determined which makes the most financial sense. Can someone help point me in a direction? Thanks!

I'm not sure if this is the right section for this, but I think it will fit. I found a home in FL that I am interested in owning for myself. The difficulty is I am in the military, stationed overseas with my family for at least another year. I have never purchased a home, so I consider this my future primary residence. I am trying to avoid an investment loan, mainly because of the larger down payment. I would like to rent this house out until the time I intend to occupy it however. What is making this difficult is the 30-60 day after purchase occupancy that lenders require. I am not asking someone to tell me what I want to hear, but to be honest so I know what to look for. Can I avoid an investment loan? Are there lenders out there that would consider my situation, and work with me? Or am I stuck with a 20-30% down payment? Any help would be greatly appreciated. Thank you in advance.

Thanks for the information. I dont think my brother is in a position to be a partner, I am just saying here is there to help if I need it. Like being there to view the property, give me actual feedback, be there for inspections, etc. I guess my main question at this point is can I complete a home purchase without being where the home is?
Additionally, I'm just looking for strictly an investment property, not to occupy it in the future.

Any other input or opinions would be really appreciated as well. Thanks.

Thanks for the quick reply. Most of that was helpful, some I think was over my head.

The home(s) I am looking at is at my home of record. Are you saying that because of that, I can be financed as an owner occupied mortgage even if I will not be immediately living in the home? Additionally, would renting the property right away be an issue if I was financed as owner occupied?

Again, thank you very much for your help.

I want to give you a little background on me first, and then explain what I want to do, and hopefully I can get a little guidance.

I am an active duty Marine stationed overseas. I want to get into real estate investing, and want to make it past the first purchase hump. I found a SFH that I am interested in. It is an REO, for about $55K. I have a bank on base that I can get a loan through, and I also have a brother in the location I want to make a purchase. I don’t have the money to put 20-30% down like the bank wants for an investment property. I do have a few thousand, and I do have extra money monthly to cover expenses during vacancy. I also have excellent credit. I plan to hang onto the home as a rental. Some of the questions I have are as follows:

-Can I purchase a home without being at the location of it (being that I'm overseas)?
-How can I avoid the down payment for an investment property? (My bank does a “future primary residence†loan but if I don’t have to live there, I don’t want to. What about a hard money loan, etc.?)
-Do I need to be at the location for a HML?
-Will it be possible to be refinanced quickly? I don’t think my bank here will do it...

The home I found is in a very nice subdivision, with a strong rental market. There are homes similar to it that have recently sold for around $100K. It needs little work, along the lines of basic yard care and paint (because of ugly colors). I feel like this home is a real opportunity for me, I just don’t know how to take the next steps. Due to my location, there aren’t any resources as far as a REI mentor that I can look to. I am hoping this forum can be somewhat of a substitute. Any help is greatly appreciated. Thanks in advance.