the rental is better off being close to yuo. iwish all my properties were located next door. itd make my job alot easier.
as far as your equity being used as down payment. every lender has its own policies, but normally they dont like borrowed money to be used as the down. they like it to be seasoned in your own private bank acconut for 3 months in order to prove it isnt borrowed and that you have the ability to control money enough to keep it on hand for 3 months without touching it.
BTW, that 500, no biggie. just factor it into your expenses on the deal and it wont trip you up. if the deal is so skinny that 500 will put you in the hole, you shouldnt be doing the deal in the first place.
I have been reading postings on this web site with keen interest and posted some questions which have been answered quite to my satisfaction.
I am looking to purchase my first investment property but at the same time I am planning also to move move into a bigger home for my growing family. I found a house that is about 450 sq ft bigger than my current home, and a house that my wife really likes, listed at slightly lower than the FMV but higher than most houses since this is among the bigger ones in the neighborhood. This is somewhat of a distress sale since the husband has left and only the wife and kids are left. Some work/expense include repainting, replacement of a closet door, and installation of all appliances except the gas range and dishwasher.
My strategy is to use part of my home equity credit limit secured through my current home as down payment (10%) for the next house and rent or lease option the current house. I am more inclined to straight rent as this is a popular rental area or just a popular area and I have 2 more years after which the prepayment penalty on the home equity loan of $500 will be waived.
My questions are: 1) Will the bank allow a home equity credit limit to be used as downpayment? 2) The two houses are within one block from each other, what are the problems with having a rental property just within a block from my home?
I asked my realtor to pull for me some comps around the area for me to come up with a reasonable offer and she’s waiting for me to call her back, which I plan to do next week. I think I am ready to become a landlord and I do have fairly high paying job to back me up.
Any response, caveats, and advise would be appreciated.
Dear Kid,
Here are some things you haven’t addressed in your post:
What are fair market rents for your current house? Will it have positive or negative cash flow when rented? (What are vacancy rates in your area? What kinds of repairs/improvements will it need as a rental?)
As Jeff mentioned, being near your rental is a good thing. Being able to drive by on a daily basis will allow you to keep an eye on the place. Let them know you live nearby (not necessarily WHERE, but “Oh gosh, I drive by here everyday on my way to work.” so they know you’re ALWAYS watching. Good tenants probably won’t care. Bad tenants probably would.
I’ve transitioned from two different houses this way (kept former residence as a rental). As long as you’ve lived in the place for two of the last five years you can take any gains when you sell tax-free (up to$250k in gains for single people, $500k for married) It’s a nice way to make a little extra money on your home in an area that’s appreciating well.
Be sure you understand depreciation for a rental, because you will have to pay tax on the depreciation you’ve taken on your rental when you sell.
See www.garytharp.com/forms/
Download the five year spreadsheet, fill in the blanks, and it will give you a lot of info (and calculates tax benefit, as well as consequences of a sale) It should help you decide if this option makes sense for you.
One last thing - check out what kind of loans are out there. I don’t think most lenders are going to go for the 10%down coming from your home equity line of credit, but there are programs with 3% down,and some that allow sellers to credit you with closing costs, so you may not need 10% to get in. If you just can’t swing a loan, you could always think about doing a L/O to purchase the house and buy it once you have the required down.