Mr katana
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| Buying a second property |
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Hello all, I bet this topic was addressed before, I apologies if it has and will appreciate if anyone could point me towards that thread. However since every situation is diffrent here is mine:
My family is growing, so we want to move into a larger property. I bought a condo 5 years ago (original loan amount 265k outstanding 228k recently refinanced at 4%).
Since this is a buyers market I'm thinking about holding my current condo for a few more years as a rental income property.
What kind of debt to income ratio do I need to have to qualify for a mortgage? Will my first property be considered investment property? Will I have to pay a higher interest rate as a result? I have debt in student loans and car payments, Im trying to figure out the best way to approach this. Should I pay down that debt? Save for a lager down payment? Im trying to put a 1 year plan in place to best position myself to buy.
Thanks in advance
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Sun Dec 09, 2012 4:45 am |
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oldguy
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Wewould need more info about your overall position to help with the plan.
Household income
Today's value of the condo
Probable monthly rent from condo
Price range of new home
And the amounts, terms of the car & student loans.
You are right about the higer interest, only one of your properties will be your primary residence. The premium for NonOwnerOccupied loans is about 1/2% to 1 1/2 %. The loans on my rental houses are at 1% premium (my loans are a few years old).
But there is an issue with your plan - one year - you should plan for at least 10 years, shortterm plans are nearly useless for planning lifetime events. Build in your 401k's, your Roths, etc, to make a Total Family Plan.
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Sun Dec 09, 2012 4:10 pm |
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Mr katana
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| Re: more information |
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Thanks Oldguy! Let me start from the end of your comment. This is a one year plan geared to best position me to apply for a mortgage in a year. My life plan is well on the way. I have been contributing to my 401k 6% for years now (to get the full 6% matche from my employer) have 20k in a rollover Ira from a old work place that I will start contributing 5k annually starting in 2013. I have 2 young kids that I opened a equity account for, setting aside a few hundred dollars per month. Currently about 12k mainly in bonds, high yield dividend paying ETF and some stock.
As for the missing information:
Current household income: $115,000 base plus 30k-50k annual bonus. My wife is currently in nursing school and starting in 2014 should earn 40k-60k (depends on work life balance we will look for at that time)
Value of my current condo (appraised when refinancing) 250k. This also brings into the discussion the option of paying the principle balance down to 200k to eliminate PMI of $161 per month.
Similar units in my building are rented for $1,500-1,700 so I would use the low end for this estimate. Maintnance costs Re $230 per month and annual taxes are $3,200.
I'm looking to purchase a property in the $400-$450 range.
Outstanding debt:
Car payments original term 5 years, $15,000 49 months and about $13,000 left on that at 4.25%
Federal student loans combined between my wife and myself $24,000. Average rate is 6.25% and monthly payments are $370.
No part of my debt has a pre payment penalty. I pay down my credit card every month to avoid finance charges and have a few k in checking and saving accounts.
Thank you!
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Sun Dec 09, 2012 5:25 pm |
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oldguy
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Good numbers, you are doing well.
Your credit score is probably close to the 800 range (based on the 4% mortgage and the 4.25% car loan). I would not prepay the low rate loans, that is inexpensive capital - but the 6.25% SL is marginally costly, it might be better to redirect the kid's accounts to the SL for now, basically you are borrowing at 6.25% and investing it in bonds & Div ETFs that probably don't exceed 5%?
Your idea of keeping the condo as a rental is probably a good plan, IMO you are likely to get good appreciation over a 10-year period. And you'll get the depreciation 'virtual' write-off on the $250k, about $3200/yr in your bracket - so that adds $265/m to your $1500/m rental income - plus the entire $9000 of interest can now be deducted (in addition to your standard deduction), currently only a portion (if any) of it counts.
Your lender(s) will allow only one primary residence loan - I don't know which one they will choose - they may not want to rewrite your current loan.
Consider this in the plan - the $1500/m future income from the rental will not be allowed when you buy the house so you'll have to qualify on earned income alone. So you may want to plan this for 2014 when DW's income adds to the $115k, that way there should be no issue (although the $115k might be enough).
That $13k to $14k that is going into the 401k/IRA is where most of your wealth will one day reside. If you have $40k now (counting the IRA) and keep adding $14k/yr for 25 more years that is over $2,000,000 at 11%/yr. But it is only $850k at 5.5%/yr - so it is key to your far-future to keep that money working. The $2M and a pair of paid-for houses in 2040 (also worth >$2M) should serve you well.
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Sun Dec 09, 2012 7:15 pm |
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Mr katana
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Thanks again Oldguy, in regards to the student loans, the only reason I did not expedite the pay back is because the interest on student loans is tax deductible, so it actually turns out to be a cheaper loan than the others.
what would happen if the bank decides that the new property is my primary residence? will I be forced to refinance the current property as an investment property at a higher rate? in this rate environment I'm in rush to pay back any debt I don't have to. however if I have to pay down my mgt to get to a better LTV I can work towards that. You also mentioned that I will have to qualify based on my income. is this a income to debt ratio? do you know what it is? that would be extremely helpful if I can plan to pay down debt enough to qualify but not too much so that I have cash left aside if needed.
Thank you
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Sun Dec 09, 2012 10:15 pm |
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oldguy
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quote:
is this a income to debt ratio? do you know what it is? that would be extremely helpful if I can plan to pay down debt enough to qualify but not too much so that I have cash left aside if needed.
Lenders often use a Payment to Gross Income ratio of 0.28. The $115,000 would carry about a $500,000 loan. And $165,000 (combined salaries) would carry about $720k. The LTV, loan to value ratio calculated a couple ways - the LTV on each property, probably limited to 80% on the NonOwnerOccupied but close to 100% on the OO. And they may run a composite calc. It varies with the era - and the lender - I once had 6 mortgages on 4 houses, the composite LTV was probably >90%. And I probably could have gotten financing to add another house had we wanted to (we 'seasoned' each house as we went so the rental income was counted).
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Mon Dec 10, 2012 12:27 am |
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Mr katana
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I really appreciate your time and energy you gave to write back. Vey detailed
and insightful answers, this helped a lot!
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Mon Dec 10, 2012 5:16 am |
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Maxwell01
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i totally agree with the comments made..
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Fri Feb 15, 2013 8:53 am |
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planetapliance
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All the member thanks for giving your best time and knowledge make aware us.
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Wed Feb 27, 2013 9:54 am |
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crawfordstuart
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Buying a rental property can help you to supplement your income, but it can also come with a lot of headaches. Be prepared to handle resident issues in a timely manner, sometimes within 24 hours. You also should be financially responsible before committing. Late-night TV shows may claim that it's easy to make a fortune renting property, but it's actually hard work.
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Wed Mar 13, 2013 1:55 pm |
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