Tapping equity with HELOC to buy new primary (in OC) then rent current primary

O

OCtoSV

Active member
Does anyone have firsthand experience with the HELOC market right now? Seems like from what I see one could expect to pay 4% fixed for a $200K HELOC assuming all drawn at once. The objective would be to buy a new place without selling our current house as we could rent it for the 15 yr mortgage payment, using the HELOC proceeds for the down and keeping mortgage debt close to even. In that case would the purchase be considered a primary, and if so what are the ramifications for the existing mortgage on our current primary, that would become an income property?

Thanks.
 
you are thinking home equity loan right? is your debt to income ratio can support all 3 payments before you rent it out? existing home?s mortgage, home equity loan and new house?s mortgage?
 
I don?t think there is a thing as fixed rate HELOC. Typically, they are tied to one of the indexes?such as WSJ prime rate etc. What do you expect WSJ prime rate to be in 2023?
 
A good question for this forum.

Your present home is your primary residence. The 1st and new HELOC are completed on a primary residence. No rate changes would occur. Lenders expect once they fund a loan that you retain the property as a primary residence for 1 year or longer.

If you are buying another property within the first year of having the HELOC, and if you plan on renting out your current primary residence while living in the newly purchased home, you could be considered as having committed occupancy fraud for the HELOC as it was funded on an owner occupied dwelling. This is a rarely (although not "never ever") prosecuted crime.

If you are buying another property as an investment home, using the new HELOC as your down payment, as long as you can debt service all three loans you are good to go. You might be able to have a tenant in the property at close of escrow and perhaps have that rental income offset the rental property expenses. YMMV lender to lender on this and there isn't enough data to advise here.

When considering a HELOC, be aware that the Prime Rate will not be where it is 6-9 months from now. A series of aggressive rate hikes are expected this year. That 4.x rate today could be 5-6x in short order, so plan accordingly.

My .02c
 
Thank you SGIP - as usual I knew you would have a concise and accurate answer. This forum has taught and continues to teach me so much about RE.

Sounds like AirBnB'ing it for 366 days may be the way to go before we move South. I could swing all three but it would be tight so wouldn't mind having some income from it.

I found this HELOC that appears to be fixed rate for the initial drawdown amount:

?The Figure Home Equity Line is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw.


For Figure Home Equity Line, APRs can be as low as 3.50% for the most qualified applicants and will be higher for other applicants, depending on credit profile and the state where the property is located. For example, for a borrower with a CLTV of 45% and a credit score of 800 who is eligible for and chooses to pay a 4.99% origination fee in exchange for a reduced APR, a five-year Figure Home Equity Line with an initial draw amount of $50,000 would have a fixed annual percentage rate (APR) of 3.50%. The total loan amount would be $52,495. Alternatively, a borrower with the same credit profile who pays a 3% origination fee would have an APR of 4.25% and a total loan amount of $51,500. Your actual rate will depend on many factors such as your credit, combined loan to value ratio, loan term, occupancy status, and whether you are eligible for and choose to pay an origination fee in exchange for a lower rate. Payment of origination fees in exchange for a reduced APR is not available in all states. In addition to paying the origination fee in exchange for a reduced rate, the advertised rates include a combined discount of 0.50% for opting into a credit union membership (0.25%) and enrolling in autopay (0.25%). APRs for home equity lines of credit do not include costs other than interest. Property insurance is required as a condition of the loan and flood insurance may be required if your property is located in a flood zone.

 
Some recent closings in my neighborhood allowed for some calibration:
If I sell now I would exceed the cap gains exclusion for a couple, so after calculating commissions and taxes we would bank ~$750K.
I would target a 3bd single level resale SFR in Mission Viejo, which I believe I could get for ~$1M. Put $250K down and we've still banked $500K, greatly accelerating retirement.

I could rent the house for the mortgage payment.

Would you sell and invest the gain in equities, or try to buy a property in OC to live in via HELOC or selling securities for the down payment and rent the house out, letting a renter pay off the rest of the 15 yr mortgage and utilize the depreciation for tax savings?
 
OCtoSV said:
Some recent closings in my neighborhood allowed for some calibration:
If I sell now I would exceed the cap gains exclusion for a couple, so after calculating commissions and taxes we would bank ~$750K.
I would target a 3bd single level resale SFR in Mission Viejo, which I believe I could get for ~$1M. Put $250K down and we've still banked $500K, greatly accelerating retirement.

I could rent the house for the mortgage payment.

Would you sell and invest the gain in equities, or try to buy a property in OC to live in via HELOC or selling securities for the down payment and rent the house out, letting a renter pay off the rest of the 15 yr mortgage and utilize the depreciation for tax savings?
Click to expand...

Sold my big house in Irvine 6 1/2 years ago and bought a house almost same size but different configuration in Legacy 6 1/2 years ago and toyed with what to do with my gains.

We had a rental in the past. No problems with it (was all paid off and tenants always paid, no real maintenance issues) but hated being a landlord. Was always worried something would happen or wouldn't get the rent. (I'm kind of a worrier anyway) so we didn't get another place. If I was going to rent, it would have been the house we lived in but it was a big place and big places are much harder to rent so we sold it. Put the money in stocks.

Would I do that NOW? Nope. Stock charts look like they did in 2000. I would WAIT to put it in stocks.

 
Not everyone cut out to be landlord. Especially, if you several hours away from your rentals.

But, I prefer to keep all my hard assets. It isn't easy to let go.
 
Compressed-Village said:
Not everyone cut out to be landlord. Especially, if you several hours away from your rentals.

But, I prefer to keep all my hard assets. It isn't easy to let go.
Click to expand...

I'm one of those who are not cut out to be landlord, but I had no choice. I bought the Lake Elsinore home at the peak (end of 2005) and when we moved to Eastvale, we had to rent it out. It's finally above water now and we can't get rid of it fast enough.
 
CalBears96 said:
Compressed-Village said:
Not everyone cut out to be landlord. Especially, if you several hours away from your rentals.

But, I prefer to keep all my hard assets. It isn't easy to let go.
Click to expand...

I'm one of those who are not cut out to be landlord, but I had no choice. I bought the Lake Elsinore home at the peak (end of 2005) and when we moved to Eastvale, we had to rent it out. It's finally above water now and we can't get rid of it fast enough.
Click to expand...

That is how we ended up being a landlord. Bought at the peak in 1989 except we wanted to move back to it eventually. The thing that got us to sell instead (when it broke even after commission over a decade later) was we found our "forever" home. Kept that one for 17 1/2 years.

 
CalBears96 said:
Compressed-Village said:
Not everyone cut out to be landlord. Especially, if you several hours away from your rentals.

But, I prefer to keep all my hard assets. It isn't easy to let go.
Click to expand...

I'm one of those who are not cut out to be landlord, but I had no choice. I bought the Lake Elsinore home at the peak (end of 2005) and when we moved to Eastvale, we had to rent it out. It's finally above water now and we can't get rid of it fast enough.
Click to expand...

so your recommendation would be to sell and bank/judiciously invest the gain vs lever up and become a landlord?
 
OCtoSV said:
CalBears96 said:
Compressed-Village said:
Not everyone cut out to be landlord. Especially, if you several hours away from your rentals.

But, I prefer to keep all my hard assets. It isn't easy to let go.
Click to expand...

I'm one of those who are not cut out to be landlord, but I had no choice. I bought the Lake Elsinore home at the peak (end of 2005) and when we moved to Eastvale, we had to rent it out. It's finally above water now and we can't get rid of it fast enough.
Click to expand...

so your recommendation would be to sell and bank/judiciously invest the gain vs lever up and become a landlord?
Click to expand...

I recommend start doing a search for property management company in the local area that are really good at what they do with track records. Its all about managing the property and how they run it. Check their fees and how they manage properties in their porfolios. Since you are in Socal and can not manage it day to day.

If you OK with fees and if monthly cash flow are positive, I would definitely keep it. You want to stack residential property as much as you can. This is another stream of income, aside from side hussles and real day job. Rental housing only going in one direction is, up. There is no questions, with rate rising, and pricing is rising too, WTF. How could that happen? Well it happen when you don't build enough housing, wether by supply chains, builders teppid from last crash, or seller have little incentive to give up their 2% long term rate, it create a hell of a low inventory.

Keep it is my recommdation. And the tax incentive for landlord is really good.
 
So we've done that and like others here... did not like being a landlord.

But... if we were to hot tub time machine, I would keep it and continue to rent out but use a property management service (that not only handled maintenance but also vetting/getting new tenants).

Made doing taxes more complicated but as CV said... there are some benefits.
 
One last idea that I didn't see mentioned...

In a rising rate environment, every asset class is expected to reset lower, so your money really isn't safe no matter where you put it.  You could hold cash, but it would still cost you 8-10% per year in real terms due to inflation.  One of the only risk-free bets is paying off debt, or conversely not getting into debt in the first place.  It's an extremely conservative move, but it would provide peace of mind heading into what many expect will be a potentially bad recession by late 2023.

The counterargument, of course, is that inflation helps you pay off debt in the long run, which is true, and a benefit when prices are rising, but sometimes reducing your risk is the optimal play.
 
OCtoSV said:
CalBears96 said:
Compressed-Village said:
Not everyone cut out to be landlord. Especially, if you several hours away from your rentals.

But, I prefer to keep all my hard assets. It isn't easy to let go.
Click to expand...

I'm one of those who are not cut out to be landlord, but I had no choice. I bought the Lake Elsinore home at the peak (end of 2005) and when we moved to Eastvale, we had to rent it out. It's finally above water now and we can't get rid of it fast enough.
Click to expand...

so your recommendation would be to sell and bank/judiciously invest the gain vs lever up and become a landlord?
Click to expand...

If you don't mind being landlord and you get positive cash flow from renting out the house, then there are benefits with keeping the house. We just don't like being landlord, and we were especially worried about the rent during the pandemic. Fortunately, our tenants didn't miss a single payment.

As CV said, if you keep the house, it's important to hire a good property management company. The one we hired charged a flat $99 fee per month, so that's a really good rate and had been doing quite a good job. But I really hated dealing with HOA. They really suck. I don't even know why we have HOA since there is no amenities and all they do is give us problems.

In short, for me, worrying about rent, maintenance, and HOA are the things that discourage us from being landlord.
 
Liar Loan said:
One last idea that I didn't see mentioned...

In a rising rate environment, every asset class is expected to reset lower, so your money really isn't safe no matter where you put it.  You could hold cash, but it would still cost you 8-10% per year in real terms due to inflation.  One of the only risk-free bets is paying off debt, or conversely not getting into debt in the first place.  It's an extremely conservative move, but it would provide peace of mind heading into what many expect will be a potentially bad recession by late 2023.

The counterargument, of course, is that inflation helps you pay off debt in the long run, which is true, and a benefit when prices are rising, but sometimes reducing your risk is the optimal play.
Click to expand...

Inflation low fixed rate debt is great because that nominal debt gets eaten away with inflation.  In an inflationary environment hard assets are the way to go which also includes real estate.  Mortgage rates may go a bit higher and the Fed will keep raising rates into 2023 but them inverting the yield curve will put us into a recession to kill inflation at which point mortgage rates will come back down as the Fed will then start cutting rates.
 
It seems the prevailing view is to retain the property. I guess I need to learn to be comfortable with leverage. We would bank the full couples cap gain exclusion, after subtracting taxes on the surplus over the exclusion, commissions and a sufficient down payment to leave me with roughly equivalent mortgage debt to what we have now. To me it seems going the route of being a landlord would take a lot longer to accumulate my projected NPV, which would immediately be invested with the asset mgr I'm already happy with where a CFA heads up the investment committee. The only downside is the professional risk of leaving SV.

This to me is the classic "stocks vs real estate" question that is endless fun to debate.
 
OCtoSV said:
The only downside is the professional risk of leaving SV.
Click to expand...

That is also the one benefit of retaining property is if you end up in a situation where you may need to move back into it.

We had to do this for a few years and saved tons of money while we shopped for our next home.
 
You must log in or register to reply here.
Back
Top