In my previous post I addressed how to take advantage of the market by selling your existing house and negotiating the best terms possible and getting enough time to stay in your house after closing until you find and purchase your replacement home, only having to move once, out of your existing home and into a new home.
In Part 2 of this article I will be discussing how to purchase a new home and get a acquire a rental at the same time…
Many of us have thought about having rental properties, but getting to that point seems daunting. Why not make your current house a rental property? Most “starter” homes make great rental properties.
Why?
The answer is that you probably didn’t spend a ton of money on it ( less than 300K) and for a 3 bed/2 ba home in the current Denver rental market you could get about $2000 – $2300 a month, possibly more depending on the location.
Lenders will allow you to claim the rental income from your current home before you even rent it out with some stipulations. If you can qualify without that ie. you can carry 2 mortgages then don’t worry about this but here is a creative approach to making this happen if you can’t.
Lenders will allow you to claim the rental income on your current place if you have 30% equity based on an appraisal and they will allow 75% of your the rental income to be counted as additional income to offset the debt of the mortgage.
For example.
You paid $250,000 for your house, with a 10% down payment, so your principle balance was $225,00 when you bought it. It’s now worth $325,000 thanks to the appreciation in our market. You now have 30% equity. 70% LTV (Loan to Value) would be $322,000.
First of all, Since you only put 10% down you likely have Private Mortgage Insurance so the first thing you should do is call you lender to have that dropped. That’ll save you some money right away. The next thing you should do is look at your mortgage payment vs. rent. If your initial loan was 225K then your monthly payment with MI is probably right around $1400 per month. Lets say your house would rent for $1,800 per month. The lender (when you are qualifying for your new home) will count 75% of the $1,800 per month rent as income. This equals $1,350. What this means is that the lender will use your current income to qualify you for a loan on your new home but not count the current mortgage against you because it is covered by the rental income. The caveat is that you’ll need to have a signed lease in place as a condition of the loan on the new house.
So here’s what you do:
1. Get qualified for a new loan assuming your rent covers your current mortgage payment.
2. Shop for a new house.
3. Get it under contract.
4. Get a lease signed on your existing home so that it starts after closing (45 -60 days or so).
5. Close on your loan and move into your new home.
6. Move out and let your new renters move in.
7. Start collecting rent checks and have a positive $400 per month cash flow plus your renters are paying your mortgage for you.
8. Start building your real estate empire.
As always, discuss this all with your lender to see if they are on board or are even aware of this possibility. If you want to talk more about this, shoot me an email or call me at 303-506-6786.
Cheers!