Using home equity to purchase rental

for rent, sign, rental-148891.jpg

using home equity to purchase rental prop.?
Posted by: jw Jul 26 2004, 10:43 AM
I currently own a home in CA and would like to use the equity to purchase a home in AZ, and rent the CA home. Is this possible? And how can it be done?

More info: current CA loan 300k @ 6.5%, we have roughly $250k in equity and would like to use roughly $200k on a down payment on a home in AZ, then rent the CA home.

We want to keep and rent the CA home for another 5 years, then sell. Some have said to get an interest free loan OR 4/1 ARM since we have every intention of selling or refi’ing in 5 years….my concern is instead of having one loan, by making the above happen, we will then have 3 loans (CA home, equity loan, AZ home).

Can someone please offer some opinions/advice on what to do?

Thank you.
Posted by: loanuniverse Jul 26 2004, 02:13 PM
Well actually there is another option, which is refinancing the California house and cashing-out $200K worth of equity. Since your 6.5% loan is a little above current market rates, that might be something you ought to take a look at.

There is no way to compare options without the actual numbers in front. And by that I mean the cost of all the options {rate, closing costs, possible PMI} and run a couple of scenarios of how long you want to hold the properties.

It is important to remember that the higher the leverage, the riskier the situation becomes specially if you can’t get the California house rented. I would also stay away from anything with a variable rate since chances are rates will be going up soon.

Good luck
Posted by: wtj Jul 26 2004, 04:00 PM
loan univ…thank you for your reply, i am brainstorming here and taking everything as ideas – w/ a grain of salt….but that just may be my best option as you mentioned (refi and cashing out 200k or whatever we see fit for a d/payment)…i do have a broker who charges nothing, yes absol. nothing for refi’ing…no fees/no hidden closing costs nothing…for the home in AZ we would put plenty down in order to avoid PMI…but you bring up a great point about not being able to rent the home in CA, with such great rates avail. right now it may be more difficult than past measures, even those w/ bad credit are able to find lenders, thus decreasing the surplus of renters in CA…what about the following since you mentioned avoiding an ARM?

doing a 5 yr interest free loan on our CA home, that way we are able to rent it and cover the costs or most costs for prop. taxes etc due to the very low mrtg payment, then prior to 5th year when principal payments are to kick-in, just refi or sell the CA home, that way we are able to take adv of the excellent appreciation rates.

your thoughts?

thanks again.
Posted by: loanuniverse Jul 26 2004, 04:27 PM
Assuming you meant “interest only” instead of “doing a 5 yr interest free loan”, I would say that this will certainly help the cash flow. Just make sure that:

– You are not paying a premium for the structure in terms of pricing.
– That there is no prepayment penalty or at least there is one you can live with.
– That the rate is not variable, or that at least has caps that you can live with.
– That you don’t confuse the historical appreciation in housing values with “future” appreciation that might or might not happen.
– That you don’t overextend yourself.

Good luck

P.S: You still need to compare the options side to side with the actual costs in front of you.
Posted by: wtj Jul 26 2004, 06:38 PM
i hear you, i appreciate your time…alot to think about. i’m 30 yrs old, so i really want to keep the CA home as long as possible — you brought up some great points…thanks again for your insights! best of luck to you as well!
Posted by: wtj Jul 28 2004, 11:39 AM
of the various mrtg advice i have rec’d regarding this topic all have said to do the following:

1) refi CA home, cashout 200k-225k (keeping 25k as a 911 fund should we have difficulty in renting our CA home)
2) use the 200k towards d/payment on AZ home (200K)

3) CA mrtg payments + taxes/etc = 1900/mo
4) AZ mrtg payments + taxes/etc = 900/mo
5) monthly payments on interest for 200k = 440/mo
total payments = 3240/mo

CA home can be rented for on conservative end 2k p/mo, leaving us w/ payments of 1240/mo (for both properties, CA & AZ)

The major RISK is not having renters for any period of time…one just never knows…

anyone’s thoughts on this, we make enough income to cover these costs and survive if CA home cannot be rented for a few months….

my main goal is too keep the CA home, my worst fear is not finding reliable renters and getting over extended…

anyone have any other suggestions? maybe some current landlords can give me some ideas of what to expect when renting a home….additional expenses incurred etc…i don’t want to go into this blind and fall on my face outright …any/all scenarios/advice are wanted

Posted by: loanuniverse Jul 28 2004, 12:35 PM
Other than the fact that you seem to be seriously understimating the interest payment on $200,000 it does sound like a plan. However, it is a risky plan and hinges on getting a reliable tenant for the CA home.

You are also not counting on having to pay someone to do property management for the house and possible maintenance expenses. Taxes might also go up if you have to forfeit a “homestead exemption” not sure about your county’s tax laws, but that is a possibility.
Author: Commercial Loan Underwriter