Question on renting my house

General Real Estate Investing
1

Hi everyone, I’m new at this and I hope someone with some experience can help me out.
I currently own a home, it is appraised at 250K. We currently owe 150K and have 100K equity tied up in the home. It is a 4 bedroom, 3 bathroom 2600 sq. ft home. We are interested in moving to a bigger house. We have enough to put 25% down on the new house. We really need to get the 100K equity to apply towards our new home.

Couple of concerns:

  1. Our house may not sell for $250K, it might only sell for $230K
  2. Paying realtor fees will really eat into our equity (average 7%)
  3. If our house only sells for $230K + realtor fees, we will only end up with $63,900

I’m trying to come up with creative ideas to get the 100K equity and I have thought about offering my house for lease purchase. Currently, my mortgage is $1600 a month (including escrow/insurance), 5.75% for 15 years, I have 150K left on the mortgage.

If I lease my house to a buyer, what are my options? Should I refinance my house to do a 5 year ARM if rates are 4.75%. That would knock my payments down to around $980 (including escrow/insurance). Tell me if I am correct in thinking:

  1. Refinance my house to do 5 Year ARM at 4.75% which knocks payment down to $980.
  2. Lease my house to a buyer for $275K with down payment of 5K and monthly payments of $1800 at 7% interest rate. This will give me $820 in positive cash flow.
  3. If my contract is a 3 year lease purchase, that will give me around $29,520 ($820 x 36 months) plus 5K up front.
  4. If they refinance at the end of 3 years, then $9K (based on the mortization schedule, how much of their monthly payments go towards their principal) + $5K (their initial down payment) will be deducted from the $275,000 price so they will refinance at $261K.
  5. That means total amount we get from our house will be 5K + $29,520 + 111K ($261K - $150K amount WE still owe on mortgage) = $140,525. We can take the $111K at the end of the 3 year lease contract and refinance our home.

Tell me if I’m correct in thinking this. I’m not sure if we will be able to do this at all. The mortgage is currently in my husbands name and if we get the new house, I’m not sure if we can get another mortgage since we would have 2 primary homes? Does that make sense? Or am I going about this in the wrong way? Please help!!!

2

Hello DN,

Im no attorney or anything, but from reading this post it looks good to me. If that means anything to you! And for the second mortgage, try changing your current mortgage to a rental property, that way it will show up as additional income on the new property!!!

Good Luck!!!

MONEY!!!

3

Hi there, DN! Nice to meet you.

From what you’ve posted, this looks like a real honey of a deal.

I am not a lender nor a mortgage broker. That said, if my understanding of financing is correct, the property you presently own can be considered an asset if you have it is generating a PCF. As long as it is taking care of itself and is covered by a one year lease, I don’t believe it will interfere with your new home mortgage. Check with someone who speciallizes in lending or brokering to verify that, naturally.

You will probably lose the homestead tax credit when you convert the first property from a primary residence to a rental. You may want to offset the difference in taxation by charging more on the monthly lease to cover it.

There are so many strategies to make this work for you it would be hard to cover them all in a message board. If you aren’t certain how best to proceed with the deal, I recommend you contact someone who speciallizes in the strategy of your choice for assistance.

Please keep in mind, even the best deal can go bad if it isn’t structured properly in the contract. Make sure all your assets are covered, even if it means paying someone a consulting fee. Better to give that consideration up front, than to pay for it in the long run because you were “pretty sure” it would work.

Relationships must be built on trust to make REI work, and when it comes to the payout, nothing beats a well-written agreement.