Future Planning Advice
Greetings all!
My wife and I purchased our first home in Tucson, AZ June 2023. We have no intentions of ever selling, but would like your advice on how we can begin to consider possible exit strategies.
The home was purchased using an assumption loan with a 2.2% interest rate! (exact reason why I will never sell). We’ve got about $175k in equity due to the large down payment needed to assume the mortgage.
Today, going rents in our neighborhood are about $300-$500 more then our current monthly mortgage payment. Our goal is to transition this into a rental property within the next 5 years.
My question to you is which trajectory do we take to secure our next home/rental property?
- Would it be smart to pull the equity and use it towards the down payment of our next home?
- Do we not even consider pulling the equity and just continue to build our savings for the down payment?
We’d like to assemble a real estate portfolio over the years, and would consider buying a rental property whilst living in our current home.
I’m looking for any creative ideas or suggestions given our circumstances. Happy to provide more information if necessary.
Thank you all!!
#1 Starting Out Contributor
- Specialist
- Mendham, NJ
You got a great deal, but don't ever say "We have no intentions of ever selling." If someone offers you 2x what you paid now, take it and do it again. Don't box yourself into a rate, but yeah, use the equity carefully and slowly if you don't have other savings to start your journey on other properties. It's good you are planning in advance.
#4 Starting Out Contributor
- Rental Property Investor
- Mebane, NC
- 230
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#4 Starting Out Contributor
- Rental Property Investor
- Mebane, NC
There's no right or wrong answer here. It all depends on your risk tolerance.
If you're okay with taking on as much risk as possible, pull out as much equity as you can from your primary and get all the mortgages the bank will let you with as little down as possible.
If you want 0 risk. Pay your house off then only buy investment properties in cash.
Only you can determine a happy in between, and it can always change depending on where you are in your life.
It's also important to note that the bigger your emergency fund is the easier it is to take on more risk.
I have come to discover that banks do not like offering HELOCs on investment properties... but many lenders are quite happy to give you a HELOC against your primary residence. So when considering your entire "capital stack" I think it is worth opening up a HELOC on your primary residence to make your equity more liquid, whether you end up doing another house hack or staying in your current home forever.
That said, we are not in a market where the average deal is likely to have enough potential return to justify paying 9-12% on a HELOC... unless there is a value-add component with a clear & compelling refi strategy later. It is probably not going to make sense to use HELOC funds towards a large down payment on another property.
My mind goes to either
1) Sneaky Rental tactic: Upgrade your primary home at prevailing rates, however unattractive they might look relative to your 2.2% rate. Your current home becomes a rental once you've moved out, and even if you aren't cash flow positive in year 1 (new rents - debt on new primary - current mortgage pmt), focus on aggressively saving towards a $10-20k cash reserve & have faith that market rents will rise over time to catch up to today's affordability crunch.
or
2) Save up a full down payment on an investment property. This way is much slower, but is more comfortable b/c it doesn't involve having to move
Really love @Bryce Jamison's reply emphasising the risk tolerance scale!
Also love @Patrick Allen's reply mentioning.
(1) HELOCs on primaries are easier to obtain
(2) High rates may make cash flow difficult unless there is a clear & compelling refi strategy
Items I'll add from my seat.
(1) Although rare we(Lower.com) offer HELOCs on investment properties, but the terms will always be better on primaries.
(2) If you're moving into the next home, needing to only put ~5% down doesn't leave you very exposed to the higher rates of a HELOC. Opinion: If you breakeven or are close to breakeven today, that's a win in this market considering the ability to refinance later.
(3) The equity of your home is currently earning you 0%, leveraging adds risk, leveraging also adds opportunity for it to earn you some money. As Bryce said, all about risk tolerance.
Quote from @Alex Kenny:
Your property will rent for $500 more than your mortgage. But you also have to pay for taxes, insurance, and maintenance (generally 10% of the monthly rent). That doesn't leave much. You should also set aside money as a reserve for vacancies, turnover costs, bad renters, or capital expenditures (roof, flooring, and other big expenses). And if you hire a property manager, deduct another 10-12%.
I think this property could work if you are careful to set aside the cash flow and build a solid reserve. But if you manage the property poorly or squander the cash flow, you can dig yourself into a hole quickly.
Cash out the equity? Terrible advice!!! If you borrow against the equity, that $500 cash flow will be eaten up by making payments on what you've borrowed and you will be over-leveraged.
Don't borrow money to borrow money. If you want another property, increase earnings, reduce expenses, and save up for the down payment.
#2 All Forums Contributor
- Investor
- Virginia
Quote from @Alex Kenny:
Greetings all!
My wife and I purchased our first home in Tucson, AZ June 2023. We have no intentions of ever selling, but would like your advice on how we can begin to consider possible exit strategies.
The home was purchased using an assumption loan with a 2.2% interest rate! (exact reason why I will never sell). We’ve got about $175k in equity due to the large down payment needed to assume the mortgage.
Today, going rents in our neighborhood are about $300-$500 more then our current monthly mortgage payment. Our goal is to transition this into a rental property within the next 5 years.
My question to you is which trajectory do we take to secure our next home/rental property?
- Would it be smart to pull the equity and use it towards the down payment of our next home?
- Do we not even consider pulling the equity and just continue to build our savings for the down payment?
We’d like to assemble a real estate portfolio over the years, and would consider buying a rental property whilst living in our current home.
I’m looking for any creative ideas or suggestions given our circumstances. Happy to provide more information if necessary.
Thank you all!!
Rents $300-$500 more than mortgage will not be a cash flowing property. Once you take into account all the expenses with being a landlord and vacancy factors. So basically you may get someone to pay your mortgage for you.
Would you take a HELOC, - only you can answer this as taking a heloc is no different than 100% financing. If the property goes vacant can you pay the HELOC AND the mortgage ? That is the question you need to answer as there will come a day when this will happen.
Key to owning real estate is cash position, if you have cash available to you, then you can survive the storms, most people go under because they lack cash, not because they lack equity.
Great question here! Always good to begin with the end in mind. When I bought my first house, I wish I had an exit strategy.
A couple of thoughts:
1. You mentioned you don't want to sell but are considering exit strategies? Typically, an exit strategy would be considering selling a property down the road. If you want to buy other properties, I would place that under a business strategy or business goal.
2. I think what are you asking for is help with an entry strategy into entering the landlord business of either short term or long term rentals. You can even do a house hack in your current home if that is doable for you. That won't cost you alot unless you do a basement build out or something of the sort. Many landlords start here. Since you newer to the business. I would suggest starting there.
3. I agree with @Nathan Gesner, I don't think borrowing money to borrow more money is a good idea. What people don't talk about is you will find yourself upside down very quickly if you don't have experience in real estate and have enough to cover the debt service. You can take the proceeds from house hacking to put into your next property if you wanted to.
#2 Classifieds Contributor
- Property Manager
- Metro Detroit
- 1,608
- Votes |
- 3,215
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#2 Classifieds Contributor
- Property Manager
- Metro Detroit
@Alex Kenny do you know who banks lend to?
Borrowers that don't really need the money!
The opposite is also true, banks don't like lending money to borrowers that NEED it as too much risk.
You may want to get a nominal HELOC on your current primary for use in case of an emergency.
When can you buy another primary with 5% down?
What will be the cost of THAT money compared with the cost of a refinance of your current home at today's interest rates - taking into account that you will be able to write off the mortgage interest for a rental on your Schedule E once you turn it into a rental?
Which scenario leads to cheaper, after tax cost of funds, balanced against your risk tolerance?
