Author Topic: Raising capital and downsizing just before FIRE  (Read 1389 times)

psyclotr0n

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Raising capital and downsizing just before FIRE
« on: October 06, 2015, 01:37:20 PM »

Hi folks, anyone have experience thinking through how to hold on to their primary residence as a rental property just before FIRE and downsizing to get expenses down?

It seems to me that while a second mortgage (if rates are still low) provides more flexibility than buying with cash from the 'stash. However, if you wanted to buy a second house while you still had a job, do you need to already be collecting rent on the first property for the bank to consider that rental income (i.e. so that you can afford the second mortgage)? Sure you could claim the second property is a rental but the idea is that you could "declare" much more rental income from the bigger primary house.

Or is there another/easier way of raising capital leveraging equity on the primary house, i.e. cash-out mortgage or HELOC/equity loan?

psyclotr0n

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Re: Raising capital and downsizing just before FIRE
« Reply #1 on: October 07, 2015, 10:35:57 AM »
Maybe my question is too convoluted?

The boiled down question is: can we get our primary residence considered a rental property when we go to apply for a loan to purchase a second home? If not, do we need to have it rented out already?

Bobberth

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Re: Raising capital and downsizing just before FIRE
« Reply #2 on: October 07, 2015, 01:08:59 PM »
Banks generally require rental income to be on 2 years of income tax returns to count it. So no, potential rent wouldn't help meeting income requirements. We had our first house sold before we bought our second house, but many people buy the second one before the first is sold. Maybe banks look at the DTI different if you have your current house on the market? There could be several ways to game that in your advantage if it is.

If you do plan on doing this, make sure you do any refinancing or HELOC before the current property is not your primary residence. You will get much better rates and terms for a primary residence than for an investment property.

psyclotr0n

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Re: Raising capital and downsizing just before FIRE
« Reply #3 on: October 07, 2015, 01:21:01 PM »
Thanks. If I'm to raise cash for a second home without selling the first it sounds like I may need to tap into equity. My DTI would be too stretched with existing payments to get a significant second mortgage. Wonder if either HELOC or equity cash-out re-fi is the better option if I'm correct..

Cookie78

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Re: Raising capital and downsizing just before FIRE
« Reply #4 on: October 07, 2015, 01:27:43 PM »
Maybe my question is too convoluted?

The boiled down question is: can we get our primary residence considered a rental property when we go to apply for a loan to purchase a second home? If not, do we need to have it rented out already?

That's exactly what I did when I bought my second house. They counted the rental income from 1 suite, AND the potential income from the suite I was living in at the time, but planned to rent. I'd only owned the first house for 13 months.

Bearded Man

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Re: Raising capital and downsizing just before FIRE
« Reply #5 on: October 08, 2015, 08:16:39 AM »
Maybe my question is too convoluted?

The boiled down question is: can we get our primary residence considered a rental property when we go to apply for a loan to purchase a second home? If not, do we need to have it rented out already?

No, you cannot. You must show a full year of rental income on your taxes before the lender will consider it a rental, and you must have several months of reserves as well, typically 3-6 months. At least that's what it's been both times I converted a primary into a rental.

Bearded Man

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Re: Raising capital and downsizing just before FIRE
« Reply #6 on: October 09, 2015, 09:45:24 AM »
Thanks. If I'm to raise cash for a second home without selling the first it sounds like I may need to tap into equity. My DTI would be too stretched with existing payments to get a significant second mortgage. Wonder if either HELOC or equity cash-out re-fi is the better option if I'm correct..

Not sure that this would help. By raising cash via tapping equity via another loan, you are essentially increasing your debt proportionate to the amount of equity you tap.