Thoughts on renting condo + buying a house

**Petunia 100** · 12-21-2012, 10:51 AM

Originally posted by uwbadgers19 View Post

Hi all, 1st post, let me know any thoughts you have. I'll try to add in enough info! Thanks in advance!

Summary: I'm 28 and wife is 29. We own a condo she bought ~5 years ago, ~180k. Assessed now at ~165k. She put 60k down and we have ~28k USABLE on the HELOC, so I think ~95-100k left. Forgive me, she is the one better with numbers

Plan: Rent out our condo and purchase a home this spring. We like the condo, but we want a house, a yard, etc. We plan on starting a family soon.

Me--~40-45k---personal trainer
Her---60-65k---mortgage loan originator

So let's say 100k combined to play it safe

Debts:
---10k on my car, paying $370/month at 1% interest and will be paid off in a little over 2 years
No other debt

Retirement
---Will both max out Roth's next year at 5500 apiece. She has a 401k at work and I think does 7%, company matches, I'm not sure of the exact. I am not offered a plan with my work.

I have ~9k in my retirement funds and I'm not 100% sure on her total, but near 30k of roth + 401k

To break even with our condo and include all condo dues, taxes, rental insurance, and mortgage, it is 1375/month. We are currently paying ~1550 a month, basically to pay down a little quicker. The cost will go up slightly as we will be using a property manager to handle renting.

Savings
---27k in savings
---28k available in HELOC
---Potential for 15k extra from a trust to be used, but trying not to.

So by the time we would want to do an offer we should have probably ~35k available in both, so ~70k for a down payment

So, the main thing I'm looking for some advice on is how much would we comfortably be able to afford in a new house?

But playing with some houses we have been browsing, if we get a 250k house and downpayment of 70k, a monthly payment including taxes and everything would be the same or less than the total condo payment currently.

Or we could go up to a 300k house and put the same $ down and assuming higher property taxes a monthly payment would be ~$200 more each month, which doesn't seem too bad.

Sorry if this is a little jumbled, hopefully it makes sense of what I'm thinking. Of course, if we can't rent our condo for $1400/month, and say it was only 1300, we would need to cover the rest. Some other units in our complex have rented for ~1400 so we are confident we can as well.

A big reason why I haven't talked about selling it is it would be very difficult. Not because th assessed value is lowering, it's because people can't get normal financing at the moment here. I believe my wife said it was because the developer owns too big of a % so the normal lenders won't do a loan....I think that is correct.

We live in a nice area in Middleton, WI.

Additional Expenses:
--Without listing everything (I've already done it in an excel) If we were to add up all other bills each month, our retirement contributions, utilities, gas, life and auto insurance, and extra savings each month ($250 auto withdrawal), we get $2300/month.

So from our ~8300/month we probably take home $5500???

5500 - 2300 = 2200 remaining

So from that we take a new housing payment

2200 - 1500 = 700 remaining for a 250k house

2200 - 1700 = 500 remaining for a 300k house

Hope that is enough info to help give some advice! Main thing I'm looking for is what you think we would/could be most comfortable at. Let me know if you need anymore info!

Unless I am misunderstanding something, part of your downpayment will be borrowed. As a rule, lenders frown on this. You will need to disclose that part of your downpayment is borrowed.

What are the terms on the HELOC? Does converting the home to a rental void the contract? Dig out the original paperwork and read through to see.

Also, it seems you will be using all of your savings. Two mortgages, a large HELOC balance, and no savings are a risky combination. I suggest you save some more before proceeding. Stop paying extra on your first mortgage (that isn't going to help you accomplish your next home purchase) and focus on paying down the HELOC and building up your savings account.

My first home was a townhouse, and my ex-husband and I kept it as a rental when we bought our next home. (Similar to now, the real estate market was in a slump and we didn't want to sell for a low price.) It worked out well for us. Best of luck to you.

**uwbadgers19** · 12-21-2012, 11:02 AM

None of the downpayment would be borrowed. We don't OWE anything on the HELOC....we are going to use it as a downpayment.

It would be our savings + using our HELOC of the condo for about 30k from each for a total of 60k. My wife does mortgage and she says we could do that, so I'm just taking her word for it

We will still have "savings" of 15k leftover, but we are trying not to use it as part of this. Unless it would be better to use that 15k and keep the HELOC more free?

**uwbadgers19** · 12-21-2012, 11:06 AM

Updated above:

140k loan from 200k condo after putting 60k down

110k remaining, thus ~30k usable I believe.

**Petunia 100** · 12-21-2012, 11:38 AM

Originally posted by uwbadgers19 View Post

None of the downpayment would be borrowed. We don't OWE anything on the HELOC....we are going to use it as a downpayment.

It would be our savings + using our HELOC of the condo for about 30k from each for a total of 60k. My wife does mortgage and she says we could do that, so I'm just taking her word for it

We will still have "savings" of 15k leftover, but we are trying not to use it as part of this.

Unless it would be better to use that 15k and keep the HELOC more free?

A HELOC is a home equity line of credit. You "use" it by borrowing on it. It is a debt which must eventually be re-paid.

Where is the 15k left in savings? Is that the expected distribution from the trust? You said it was "potential". Is it uncertain? Or perhaps the distribution is certain, but the amount is an estimate? Do you expect you will have received it before you purchase a second house?

Does your wife work for a particular mortgage company, or is she a broker who can shop for the best deal from competing lenders?

**uwbadgers19** · 12-21-2012, 11:43 AM

Originally posted by Petunia 100 View Post

A HELOC is a home equity line of credit. You "use" it by borrowing on it. It is a debt which must eventually be re-paid.

Where is the 15k left in savings? Is that the expected distribution from the trust? You said it was "potential". Is it uncertain? Or perhaps the distribution is certain, but the amount is an estimate? Do you expect you will have received it before you purchase a second house?

Does your wife work for a particular mortgage company, or is she a broker who can shop for the best deal from competing lenders?

The 15k is technically money we can use and could be taken out at any moment. It isn't uncertain. It's under her parents control for now. So, if we needed it we could, but we are trying to not use it so we have it down the road for whatever/whenever.

She works for US Bank.

**Petunia 100** · 12-21-2012, 11:55 AM

Originally posted by uwbadgers19 View Post

The 15k is technically money we can use and could be taken out at any moment. It isn't uncertain. It's under her parents control for now. So, if we needed it we could, but we are trying to not use it so we have it down the road for whatever/whenever.

She works for US Bank.

I see, it is "potential" only in the sense it is not currently in your bank account but in the trust's account. But it is yours in that you can receive it anytime that you choose. So emergency money is covered, that's good.

Is US Bank the lender for both your mortgage and HELOC? Would you take your next mortgage from them as well?

Once you start a family, will your wife continue to work full-time? If so, have you priced child care in your area?

**uwbadgers19** · 12-21-2012, 12:02 PM

Originally posted by Petunia 100 View Post

I see, it is "potential" only in the sense it is not currently in your bank account but in the trust's account. But it is yours in that you can receive it anytime that you choose. So emergency money is covered, that's good.

Is US Bank the lender for both your mortgage and HELOC? Would you take your next mortgage from them as well?

Once you start a family, will your wife continue to work full-time? If so, have you priced child care in your area?

Yes, correct on that 15k

I believe it's BoA for our condo. Would go through US bank, we get a discount on rate I think from her job.

She will continue to work full time as will I. We will have a good situation in which I work 5am-12 and she works 9am-5pm and we will have our sister in law babysit as she stays home already. Cost should be relatively minimal compared to people that don't have that type of flexibility.

So, it will be a cost, but not too bad. Also, my car will be paid off pretty much at the same time we would soonest have a child so that is 370 a month extra there. Her car is 2006 with ~40k miles only and paid off. Mine is a 2010 with ~40k and will be paid off in 2 years.

**BuckyBadger** · 12-21-2012, 12:49 PM

Borrowing from a HELOC makes sense if you're selling the house on which the HELOC is drawn. It doesn't make sense to borrow $35k and then have to keep paying it back on a house you're not selling.

As previously mentioned, using a HELOC for a down payment IS "borrowing money for a down payment" and it is not looked at very well by mortgage companies.

Unless you are planning on something else, or your terminology is different, you ARE planning on borrowing $35k for your down payment. That�s what a HELOC is. Borrowed money.

Am I missing something here?

**uwbadgers19** · 12-21-2012, 12:58 PM

Originally posted by BuckyBadger View Post

Borrowing from a HELOC makes sense if you're selling the house on which the HELOC is drawn. It doesn't make sense to borrow $35k and then have to keep paying it back on a house you're not selling.

As previously mentioned, using a HELOC for a down payment IS "borrowing money for a down payment" and it is not looked at very well by mortgage companies.

Unless you are planning on something else, or your terminology is different, you ARE planning on borrowing $35k for your down payment. That�s what a HELOC is. Borrowed money.

Am I missing something here?

Well, technically WE wouldn't be paying it, our renters would be. Does that change your thoughts on it?

**BuckyBadger** · 12-21-2012, 01:02 PM

Originally posted by uwbadgers19 View Post

Well, technically WE wouldn't be paying it, our renters would be. Does that change your thoughts on it?

They're not MY thoughts.

The issue is that the mortgage lenders don't like it if you have to borrow money to make a down payment. They will search back and trace all your money. You have to disclose all your debts to them or it's fraud. If you tell them that you borrowed $35k from your HELOC on another house, they will have BIG problems with that. It indicates that you can't afford the home, much less two homes.

And what if you don't have renters for a few months here and there? 100% occupancy rate is difficult to achieve. It'll be REALLY easy for you to get into a LOT of trouble with this plan.

**Petunia 100** · 12-21-2012, 01:07 PM

Originally posted by uwbadgers19 View Post

Yes, correct on that 15k

I believe it's BoA for our condo. Would go through US bank, we get a discount on rate I think from her job.

She will continue to work full time as will I. We will have a good situation in which I work 5am-12 and she works 9am-5pm and we will have our sister in law babysit as she stays home already. Cost should be relatively minimal compared to people that don't have that type of flexibility.
So, it will be a cost, but not too bad. Also, my car will be paid off pretty much at the same time we would soonest have a child so that is 370 a month extra there. Her car is 2006 with ~40k miles only and paid off. Mine is a 2010 with ~40k and will be paid off in 2 years.

That's great.

Well, this is what I would do if it were me:

1. I would make certain turning my primary residence into a rental didn't void the HELOC contract. (It might not, but it might.)

2. I would find out the rate and repayment terms of the HELOC, then calculate what my monthly payment would be if I drew 30k. (Assuming I am OK after doing #1).

3. I would decide if I was willing to part with every cent of my 15k in the event my condo needed an expensive repair, or my new house did, or my renter stopped paying rent. Hopefully, all 3 will never happen simultaneously.

4. I would determine how much I should be setting aside each month to cover maintenance on two homes.

5. I would find out how much I could expect to pay for utilities in my new single family home. Will you be paying some for the first time? (water, garbage, etc.)

6. I would ask my wife to crunch the PITI (principal, interest, taxes, insurance) of a 250k house and a 300k house.

If I added that all up and felt comfortable with the answer, then I would proceed. If I didn't feel comfortable, I would wait until I had more money saved.

**uwbadgers19** · 12-21-2012, 01:17 PM

Originally posted by Petunia 100 View Post

That's great.

Well, this is what I would do if it were me:

1. I would make certain turning my primary residence into a rental didn't void the HELOC contract. (It might not, but it might.)

2. I would find out the rate and repayment terms of the HELOC, then calculate what my monthly payment would be if I drew 30k. (Assuming I am OK after doing #1).

3. I would decide if I was willing to part with every cent of my 15k in the event my condo needed an expensive repair, or my new house did, or my renter stopped paying rent. Hopefully, all 3 will never happen simultaneously.

4. I would determine how much I should be setting aside each month to cover maintenance on two homes.

5. I would find out how much I could expect to pay for utilities in my new single family home. Will you be paying some for the first time? (water, garbage, etc.)

6. I would ask my wife to crunch the PITI (principal, interest, taxes, insurance) of a 250k house and a 300k house.

If I added that all up and felt comfortable with the answer, then I would proceed. If I didn't feel comfortable, I would wait until I had more money saved.

Thanks for all the thoughts. The $2300/month I listed earlier include all current monthly spending including new bills......water is new and we guess electricity would be double or so.

So $2300/month =
Food--150
Gas---100
Life Ins.--30 combined
Auto Ins.--105 combined
Roth IRA for both ($458 each)---917
Water---30 (not currently paying)
Electric---200 (currently pay much less in condo, so we guessed high for a house)
Cell phones---120
Internet---50
Cable---70
ING Savings---250
Car---370 (for 27 months)

Right now we pay ~1500 total for the condo including taxes/ins. So trying to keep a new house payment near that or slightly above, 1700, would give us all expenses/savings for $4000/month and we bring home an actually $5500-6000 each month after taxes.

So that leaves up 1500-2000 each month.....this money could also be used in case of non rental times.

**siggy_freud** · 12-21-2012, 02:32 PM

OP, keep in mind that generally lending institutions won't count your rental income as income until you've been receiving it for at least two years. This may play into what you get approved to borrow.

Borrowing money from a HELOC for a down will also complicate things, as that will further increase your debt/income ratio and will also play into how money they'll lend you. I'm sure your wife is all familiar with this, but thought I'd mention it.

You should be budgeting the rental to account for down times when it's empty. If you're using a property manager, you can use incentives to keep it filled, like a "bonus" for filling it. That said, you want to ensure it's a good long-term tenant, so structure the incentive so it's not an immediate payout, otherwise, they'll just keep rotating people in. Good property managers can be hard to come by, so do your homework, and get plenty of references.

**uwbadgers19** · 12-21-2012, 02:40 PM

Originally posted by siggy_freud View Post

OP, keep in mind that generally lending institutions won't count your rental income as income until you've been receiving it for at least two years. This may play into what you get approved to borrow.

Borrowing money from a HELOC for a down will also complicate things, as that will further increase your debt/income ratio and will also play into how money they'll lend you. I'm sure your wife is all familiar with this, but thought I'd mention it.

You should be budgeting the rental to account for down times when it's empty. If you're using a property manager, you can use incentives to keep it filled, like a "bonus" for filling it. That said, you want to ensure it's a good long-term tenant, so structure the incentive so it's not an immediate payout, otherwise, they'll just keep rotating people in. Good property managers can be hard to come by, so do your homework, and get plenty of references.

Thanks for the thoughts! I do believe my wife has crunched the numbers and using our incomes we can qualify for both. We are aware of the 2 years with the rental income.

She is in a networking group and knows the prop. manager well so that makes me feel better. I like the "bonus" idea.

Thoughts on renting condo + buying a house