Author Topic: It's complicated... (advice please?) UPDATED... THANK YOU :)  (Read 2915 times)

tammyLav

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It's complicated... (advice please?) UPDATED... THANK YOU :)
« on: January 27, 2017, 09:08:47 AM »
Thank you for taking the time to read my post :) I will try and be brief, but you read the title here...

So we bought our house ten years ago, at the time being careful to keep it small and not overreach. Still, it was a bubble, and you know what happened next. At the time, we were trying to just own a home because both sets of parents were advising us this, and we knew so much less than we do now. I wish I could go back, but here we are. We had to get a HELOC to purchase the house, and then things bottomed out.

So today, my house is barely worth more than I owe on it. We are in the black, but not by much. My main goals are 1) Get rid of the damn HELOC, and 2) Get into a position where we have equity in our home, so that  we can get our finances in order and 3) we can eventually start investing in real estate

mortgage: 185,000  4% interest
HELOC:       59,000  6% variable rate
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                $244,000 is what we owe.  $1500 mortgage is fixed, with $450 that's variable

So what would you do in my situation? Thank you in advance for your advice!

SELL:    We MIGHT be able to sell for $270, but the market is soft still. Our neighbors tried to sell a roughly comparably sized home, and it just sat. Our roof is old, and there are some foundation issues that might cause trouble for us, but overall the house is cute, with good curb appeal. (It's a little beachy bungalow... 45 min commute to NYC by ferry)

TRY TO BUILD EQUITY: Another option we are looking into is a construction loan to do a second floor, and build equity into the home that way. This would allow us to get rid of the HELOC, and position the house better for resale.

RENT FOR A LITTLE WHILE: The rental market here is hot, and our realtor, who is also a property manager, feels that we should be able to get about $2200 in rent, with management fees taken out of that. The idea here would be to try hold for a few years until the market improves, and sell the house for a higher rate.

ON A SIDE NOTE Our financial situation has been rocky, due to a failed business. We are on the upswing now, and looking better by the day. We are looking to be debt-free within the next 1-6 months, so this is all part of the same plan to wrangle our finances and get our money working for us.

         
« Last Edit: January 27, 2017, 09:26:34 PM by tammyLav »

KCM5

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Re: It's complicated... (advice please?)
« Reply #1 on: January 27, 2017, 09:22:43 AM »
Whats the plan if you sell or rent your house. Will you stay in the area? Are you planning on moving? Is there a reason other than equity that you want to sell/rent/add on?

tammyLav

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Re: It's complicated... (advice please?)
« Reply #2 on: January 27, 2017, 10:12:39 AM »
We plan to stay in the same town for at least the next 5 years. Our house is too small, but more importantly, it sits low, and while our street didn't flood after Sandy, we always have that hanging over us. So I am looking to achieve 1) space 2) equity and a marketable property so that we could sell more quickly if we found a better property.

I'm kind of over having to own my own home, truthfully. Our assets have been locked down for a few years now, and I would love to have flexibility, now that are debts are gone and business is looking up. Since one of our main goals is to get into real estate investing, I'm trying to make decisions that will move me closer to that coal, and this house has been a bit of an albatross. I also don't mind staying, but I need it to be on better terms.

tralfamadorian

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Re: It's complicated... (advice please?)
« Reply #3 on: January 27, 2017, 11:39:04 AM »
I'm kind of over having to own my own home, truthfully...

but the [selling] market is soft still...

The rental market here is hot...

one of our main goals is to get into real estate investing...

As a real estate investor I think your home may be a great candidate for renting; the rough numbers you provided line up for what would be considered a good investment. 

I understand your hesitancy on owning property in a low-lying area.  I'm in the process now selling a rental property that I love except for the potential of flooding in the future, particularly if sea levels rise.  However, I waited until the real estate market in that area was very hot. 

Megma

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Re: It's complicated... (advice please?)
« Reply #4 on: January 27, 2017, 11:58:06 AM »
Three comments:

1) I would be hesitant to take out a 3rd loan to do construction on the 3rd floor. It just seems risky to go further into debt to try and get equity in your house. If you can't pay for the construction without a loan, I wouldn't do it.

2) If you want to stay in the same town and you rent out your house, are you then going to be renting a larger place at a greater cost? If the rental market is hot won't you be paying a lot more in rent also? If you really need more space, this could be ok I guess but it seems odd to pay someone to manage your house as a rental so you can rent another house in the same town.

3) You say you are over home ownership and want flexibility but also that you want to get into real estate investing - these seem at odds to me. Perhaps because I am assuming you will do buy and hold investments, which are not flexible and all about owning lots of homes. Maybe you have something else in mind :-)

tammyLav

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Re: It's complicated... (advice please?)
« Reply #5 on: January 27, 2017, 12:28:47 PM »
So we already have 2 loans. Part of the problem here is the HELOC. I want it gone, because rates are good, and it is variable, so I would like a single fixed rate loan. The loan to value on the house is about 89%, so the value makes it difficult to work with. We also have the aforementioned old roof and need for underpinning foundation in the front, along with some improvements I was hoping to make.

Do you think I should just sit tight and maybe just to a straight refi, and then pay for light rennovations on my own one at a time?

The idea of renting elsewhere is to get into something bigger in size. We don't need a ton of space, but specific items I'd like (i.e. a laundry room and a second bathroom). We are at a crossroads with the business starting to take off, but still getting past our debts, so I anticipate our financial options will look different in 6 months. I neglected to mention that our HELOC is maturing this week, so we will be paying on that mortgage now. It isn't a big deal, we can afford it... but it bothers me that we still have it. I guess my urgency is just trying to get out of this mess from the past, and get on with our goals, now that we are older and wiser.

As for my thoughts on home ownership, I guess I mean that I want to buy based on whether or not my property is a financially good decision, not because I'm looking for a "forever home." I would love to purchase a duplex and rent part of it out, for example.

tammyLav

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Re: It's complicated... (advice please?)
« Reply #6 on: January 27, 2017, 12:32:24 PM »
I should add that when I mean flexible, I mean my house is tiny and in need of repair, and the upside down nature of it has me feeling stuck. It's my frustration talking, lol. We would be doing buy and hold. Right now I'm just a fly on the wall and trying to learn as much as I can. (I just REALLY want a laundry room)

financialfreedomsloth

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Re: It's complicated... (advice please?)
« Reply #7 on: January 27, 2017, 01:30:50 PM »
I should add that when I mean flexible, I mean my house is tiny and in need of repair, and the upside down nature of it has me feeling stuck. It's my frustration talking, lol. We would be doing buy and hold. Right now I'm just a fly on the wall and trying to learn as much as I can. (I just REALLY want a laundry room)
So you want luxuries while you still have a HELOC at 6% and have barely paid down the mortgage on your house?

FACEPUNCH

First pay off the HELOC, then save for an emergency fund, then save for the renovations and while saving for the renovations have a long and hard thinking about improving the house or selling/renting it out and moving yourself. Building equity in your only house where you also live is useless in the short term. Yes, you have equity in your house but until you sell the house (or rent it out at a very nice rate) that equity is doing nothing for you. It's tied up in the house, sitting there (hopefully appreciating).

MommyCake

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Re: It's complicated... (advice please?)
« Reply #8 on: January 27, 2017, 01:47:34 PM »
What financialfreedomsloth said.

If I owed 59k @ 6%, paying that off would be my primary focus.  Getting another loan for home improvement for my own comfort would not even be on the table for me.  If I were in your position, I would first and foremost pay off the 59k, and after that debt is gone I would start saving for a down payment on a rental property, if that is still your goal at that time. 

tammyLav

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Re: It's complicated... (advice please?)
« Reply #9 on: January 27, 2017, 02:28:34 PM »
We ultimately want to either sell or rent this house. I'm really curious here, but why pay my HELOC off, when refinancing would get rid of it as well? If we didn't do a second floor, and just refinanced, my total monthly mortgage would be around 1500, based on the calculators I've run the numbers through (so rent possibility is +5-$700/mo). I could scrimp to pay that HELOC off, or buy two properties with the same amount of money. If I'm thinking of this the wrong way, please let me know why. I'm not necessarily afraid of debt, I just want it working for me. Thanks!

* My ultimate goal is ultimately to purchase a rental property, additional living space and higher ground (i.e.  not my current house)
* the second floor wouldn't be first and foremost about my comfort. I'm trying to increase the value of the house for sale/rent


SnackDog

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Re: It's complicated... (advice please?)
« Reply #10 on: January 27, 2017, 03:14:36 PM »
Get the best rate you can on a refi.  Then save up a small down payment on seller-financed rental property.  Rinse and repeat.

MommyCake

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Re: It's complicated... (advice please?)
« Reply #11 on: January 27, 2017, 05:18:53 PM »
We ultimately want to either sell or rent this house. I'm really curious here, but why pay my HELOC off, when refinancing would get rid of it as well?

You mentioned earlier your loan to value was 89%.  Most lenders require 20% equity for refinancing.  If you can get approved and it saves you interest, go for it.

I'm in a similar boat here in NJ with an investment property purchased in 2007.  I would like to refinance but with current values don't have enough equity. 

tammyLav

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Re: It's complicated... (advice please?)
« Reply #12 on: January 27, 2017, 06:29:32 PM »
Yes mommycake, it sounds like a similar situation. That's the problem. My options are limited. I have no problem buckling down to pay things back, but If I could get the property to work for itself, I'd rather go that way (hence, the possible construction loan)

Landslave

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Re: It's complicated... (advice please?)
« Reply #13 on: January 27, 2017, 06:36:49 PM »
  Seems like a good rental property.  And no costs of origination.  How much would the roof and foundation cost to fix?  One good thing is that rents are much more stable than housing prices.

   On the other hand, we sold a flood zone property and are selling ALL our flood zone properties except our primary residence because they just don't bring a premium of rent required to pay the high priced flood insurance premium.  Hope this helped. 

Another Reader

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Re: It's complicated... (advice please?)
« Reply #14 on: January 27, 2017, 06:59:05 PM »
Renting this property would be cash flow negative with the numbers you state.  At $2,200 rent, you can anticipate expenses of around 50 percent or $1,100.  That 50 percent includes vacancy and collection loss, management, taxes, insurance, repairs and capital improvements.  Given the age and condition of the house and the high property taxes in New Jersey, that's probably a pretty good estimate. 

With your current finances and the house already fully leveraged, how would you qualify for a construction loan for the addition?  Not sure a bank would take on the risk of low lying property anyway.  Are you in a flood zone?

You say you want to get into rentals.  What have you done to educate yourself about the rental business?  Read the "How to" post pinned at the top and Gallinelli's book on rental property if you have not done so.  One business failure in a lifetime is all anyone should go through.


tammyLav

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Re: It's complicated... (advice please?)
« Reply #15 on: January 27, 2017, 07:31:33 PM »
Very good questions. Thank you! Perhaps the numbers don't work out profitably. You're right that I did not include losses in that figure. In any case, I wouldn't have purchased this house as a rental income property. I'm hoping to just hold on until the value goes up a little more. I ran my numbers through NY Times rent or sell calculator and it seemed to indicate that renting would get more money, but I don't doubt what you are saying. If we can't refinance, it makes it too expensive to rent it out.

I've gone over the numbers with a mortgage broker, who felt that the construction loan might be a good way to approach it. I worked through the numbers with a second mortgage broker who basically said, if we could make it work, that the construction loan is the only way forward. The other options are, of course, to either put the house on the market and hope we can get a little back from it, or live with the HELOC for the time being.

Our income is pretty good which is one mark in our favor. Business is rapidly picking up and projects are starting to click (my husband and I are virtual reality developers... luxury real estate anWonths, once we have wiped out the rest of our debt (except the heloc).

Perhaps we just wait for now?  We are not in the area that flooded during Sandy, but the streets on either side of ours did flood. We are at 12 ft elevation, and had to evacuate furing Irene and Sandy.

rpr

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Re: It's complicated... (advice please?)
« Reply #16 on: January 27, 2017, 07:41:32 PM »
Since you say that you have a good income, can you not make additional payments regularly in order to get the LTV below 80 so that you can refi to a lower rate? How long would it take?

tammyLav

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Re: It's complicated... (advice please?)
« Reply #17 on: January 27, 2017, 07:54:18 PM »
We could certainly move on to doing that. The income increase has been more recent, and all our attention is on credit card debt. Once that's all done in the next few months, we had planned to start saving up for an investment property, but before we do that, paying the HELOC down could be a strategy. I had always hoped to deal with it through a sale or a refi, but maybe I need to accept that it just isn't going to go that way.

Just curious, but if we could qualify for a small construction loan, and get rid of the heloc in the process, why would you recommend against it, if my end goal was making it easier to market the house? Is that too risky?

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Re: It's complicated... (advice please?)
« Reply #18 on: January 27, 2017, 08:35:18 PM »
Yes, it's too risky.  You have no experience, no idea what construction costs, and no idea what the property would sell for if you did this.  You could end up digging yourself a much bigger hole doing the addition.

In your shoes, if business is improving dramatically, that's where I would focus my time and energy.  Pay off the credit card debt and get yourself in a stronger financial position.  Once you are there, then deal with the house.  It will be a drag on your resources until then, but it would be difficult to sell and rent now, just as it would be difficult to do an addition.

tammyLav

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Re: It's complicated... (advice please?)
« Reply #19 on: January 27, 2017, 09:24:42 PM »
Thank you! These responses have been so helpful, and I'm definitely listening. If there's a way, I may still explore a simple refi, but otherwise it's credit cards first, and a focus on continuing to build our business. Once the credit cards are gone, I will turn my attention to the heloc, and then maybe this summer we can make some decisions on what to do with the house.

It is exciting to see our hard work begin to pay off with the business, and everything has been locked down as we've been slowly building it up... I guess I've just been getting antsy to move on with our goal of getting the rental property and torching the heloc...  but I'm just going to print this thread out and remind myself to be patient ;)

« Last Edit: January 27, 2017, 09:28:07 PM by tammyLav »

rpr

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Re: It's complicated... (advice please?)
« Reply #20 on: January 27, 2017, 11:26:56 PM »
Thank you! These responses have been so helpful, and I'm definitely listening. If there's a way, I may still explore a simple refi, but otherwise it's credit cards first, and a focus on continuing to build our business. Once the credit cards are gone, I will turn my attention to the heloc, and then maybe this summer we can make some decisions on what to do with the house.

It is exciting to see our hard work begin to pay off with the business, and everything has been locked down as we've been slowly building it up... I guess I've just been getting antsy to move on with our goal of getting the rental property and torching the heloc...  but I'm just going to print this thread out and remind myself to be patient ;)


That is a good plan especially since,

from the wise one, it comes ;).

Stick to it. The credit card debt is the killer. You need a laser sharp focus to combat it. Good luck.

Megma

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Re: It's complicated... (advice please?) UPDATED... THANK YOU :)
« Reply #21 on: January 29, 2017, 09:46:35 AM »
+1 for waiting. If your business is picking up and you'll be in better shape in 6 months, wait the 6 months and in the meantime put all extra money on your heloc to shrink it.

Just to add refi'ing and including your heloc doesn't get rid of any of your debt, just rearranges it. You keep saying you want to refi to get rid of it, but it busy moves it. Yes it could still be beneficial in regard to interest but it doesn't reduce your debt.