I’m new here and new to investing, I currenly own my own home, and am interested in purchasing another as a rental investment.
My mortgage lender suggests using the equity in my home to use as a down / back up for vacancy.
This is a brand new home, in the 150,00.00 range, with guarenteed renters. Is this a wise choice or too risky?
Thanks in advance.
Why do you feel that there are “guaranteed renters”? Guaranteed by whom? Guaranteed for how long? What rent can you charge for these properties? How much are taxes? How much is insurance? If there are “guaranteed renters” why would you need a “back up for vacancy”?
I personally do not like putting my personal residence at risk.
For us to decide if it is a worthwhile investment, you would need to do a cashflow analysis and find out if the property makes financial sense. In the rental world, CASHFLOW IS KING!
Keith
Thanks for the reply.
According to my lender, who owns several homes in the area, and is buying more that are being built as we speak, will have no trouble renting.
The management firm for the area has a list of renters waiting for vacancies, as it is a “software” area with traveling people constantly being re-located. Of course there is no “guarentee”, but the houses are being sold for 225,000-250,000. My mortgage with taxes and insurance would be 1280.00 with 20 percent down from the equity in my home. Rent in the area is from 1300 to 1600 monthly.
The builder has no restrictions on selling or renting, a few houses that were built last fall and sold for 20000, are now selling for 275,000, with many rentals as well.
I have 78,000 in equity in my home, and would like to take it out to use 20 percent down on the new home, pay off my credit line(cards) from my remodeling of my home, and prepare my home for a rental as well, as I am aquiring a trust deed on a home from a relative to “turn over”.
Let’s see:
Income (max): $1600
Outgo:
PITI: $1280
Maintenance 50
Management (7% of gross) 112
Vacancy (5% of gross) 80
Total $1522
Cashflow: $78
This does not include the cost of using your money ($30K).
I’m kinda confused about your posts…in the first one you asked about a house for $150K and in this post you say $225 - 250K…??
I think this is a marginal rental at the very best. But, it looks like some appreciation is possible so for a speculation that is breaking even, it may make some sense. It is certainly no “money-maker” as a rental.
Keith
Welcome and STOP! What you are suggesting I don’t feel is the best way to go. If your house is worth $178,000 and you owe $100K, you want to take your $78K equity and put it down on a rental! Why would you do that?
Your rental property is costing you $50K cash, and you’re getting a payment of $1280 PITI, on a home you can rent for MAYBE $1500 a month. Did you count 1% of the monthly rent for maintenance and repairs? That’s the average. Add the $100+ per month and you are up to $1380. What about vacancies? You are almost guaranteed to have vacancies as you said you are in an area where PEOPLE ARE CONSTANTLY BEING RELOCATED. Allow one month per year for vacancy – another $125 per month. So this house will cost you around $1500 per month. At $1500 per month rent, you’ll be lucky to break even. You have $28K left to payoff your credit line.
So after 3 years you will have $28,000 to pay off a credit line and no positive monthly cash flow.
==============================
Try this: You just remodeled your home – it’s an asset. Make it work for you. Refinance and pull out $50K. You won’t have to pay taxes now as this is borrowed money. This is an owner occupied loan. Now place your home in a land trust. You name your Trustee (I use a non-profit corporation that specializes in trust transactions) and title is taken in his name. You are the sole beneficiary of the trust. Your Trustee owns the real estate. You own the trust (personal property) that controls the property.
Triple net lease your property to a tenant willing to accept full responsibility for maintenance and repairs and pay a higher rent. If they will do that for you, you will grant them an immediate 50% beneficiary interest in the trust giving them full homeownership benefits including the mortgage interest writeoff, property taxes writeoff, and a 50/50 share of future appreciation over $188K. It’s a great deal for both of you.
Let’s say your new payment on your house is $980 plus $170 taxes and insurance – total $1150. You can charge $1500 per month for this opportunity. You receive no down payment. Your new tenant will pay three monthly payments ($4500), (two will be held in reserve if ever a default occurs), plus your “closing costs”, which include the costs of setting up the trust and legal and accounting review ($2000), plus $1000 for you.
Your tenant pays a total $7500 upfront, and $1500 per month (that’s a positive cash flow of $350 per month for 36 months or $12,600 over 3 years). You have no responsibility for maintenance and repairs, and Your Trustee collects the rent and pays the mortgage and you monthly. Your lease lasts 2 years, 11 months and 29 days so as not to trigger the DOSC.
A co-beneficiary owned Trust property is very solidly protected and shielded from actions associated with any party’s past bankruptcy, creditor claims, and civil judgments, litigation in marital dissolution, probate actions, and even state and federal income tax liens.
Once the Trust and TRIPLE NET LEASE is established your new Lender will receive, from the Trustee, a Rent-To-Income Letter telling the Underwriter of the new loan you are applying for how they are to credit the RTI. In 99% of the cases you will only get them to credit you 60% to 70%, but in the case of a Trust and subsequent LONG TERM NET LEASE the lender’s underwriter will give you a full 100% RTI credit for the full amount of the RBs payment, even if you personally aren’t the one recieving it.
On a normal lease to own payment of $1000 per month the lender will only give you up to 70% credit or $700 vs. the Trust of all $1000.
Why? Because they don’t have to factor in Vacancy or Maintenance because it is a Long Term NET Lease. In my experience it not only allows for financing but better financing and actually improves your ability to get a better or larger loan.
Now you put just 10% cash down on your rental property. You can get a new loan for $225K . Your payment for everything will be around $1500, unless you go for an interest only or option ARM in which case you will make a huge monthly cash flow. Go through the same process, put the home in trust and repeat as above. I wish you the best of success.
I don’t know if you should do the particular deal you are talking about above, however I take issue with not using your home’s equity for real estate investment. Why wouldn’t you want to use some personal equity to buy an investment property? If you do not have other means of getting down payment cash then using your heloc is better than not doing anything. Yes some unconventional means of getting investment property is out there but if you have access to cash why not use it? I suppose if you have no job and no other means of paying your heloc back,your personal house is on the line.
I however have a decent job and make decent cash and don’t feel the risk is too high.
TP
And if the worst happens and I lose my job and can’t pay down my HELOC maybe I’ll have the pleasure of meeting one of you someday. 
I am a newbie and I have used the equity in my personal home over the last 18 months to buy investment property. I agree that you can expect your expenses to be far higher than you have calculated. I also agree that if you have no other source of cash it is a good way to begin investing.
Dee
Thank you all for the replies and advice.
I am not going to do this deal until all #S are calculated to my advantage.
The one positive I have is that the new home purchase, for 250,00. ( not 150, sorry typo ) has a 2 year warrenty for maintenance.
They typical renter’s for this area is a software engineer that is located for 5 year jobs at a certain facility.
If I can establish a positive cash flow I would feel I am at an advantage as the equity for this area in 2005 was 24 percent increase.
buy in an area where you’re cashflow neutral with 100% financing.
if you must put money down calculate your return on investment.
assume atleast a 10% vacancy and a 10% prp mgmt fee and a 10%
maintenance cost on the rents.