So I told you we had our taxes done a little while back. While we were there our accountant told us one way we could buy a house that I thought was interesting. Here it goes as best that I understand it:First off, we’re fortunate enough to own our co-op apartment outright. We hope to be able to sell it one day so we could buy a house of our own. What our accountant told us was we could get a home equity loan on the co-op and use that loan as a down payment for a house. This allows us to buy a house in a depressed market without having to sell our apartment in the same market (buy low/sell high).
Ok great, now what am I going to do with two homes? Well, we would then rent the co-op out to tenants for the next two years. After that we would sell it, hopefully for more than it’s worth now. Since we would have lived in the co-op for three of the last five years we wouldn’t have to pay a capital gains tax.
So basically we would be using our co-op’s equity to help buy a new home. We would buy a home now when prices have been dropping and sell our co-op when prices have normalized and/or risen (but low/sell high).
I’m not sure if we’re ready to buy a house just yet. We definitely want to someday soon but we want to make sure we have enough savings to cover any issues we may have with the house and to make sure we can afford the payments should any emergencies arise (like a car accident). This will definitely be one way for us to consider buying a house when the time is right though.
What do you think? Is this a good way to purchase a house? Do you have any experiences similar to this?
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{ 7 comments… read them below or add one }
My bank used to offer home equity line of credit loans with no fees.
To buy this house my Dad did a HE on his house, gave me cash to buy this house and I did a HE on this house (it was bought at 60% of the tax value at an estate sale) to pay Dad back. I didn’t have closing costs which saved 3K and we were able to complete the cycle in 4 weeks. I also had a very low interest rate (4%) because of the bank special
Could be a good way to buy the house if two things hold true:
1. With your home equity and the existing and new mortgage you still fall below the debt to income ratio threshold for any bank to provide you the new mortgage. This can be difficult for most people if they bought the max house first time around and have not yet built up enough equity. If you qualify, kudos to you
2. The housing market cooperates and you are able to find a good renter (arguably, the income from rent should improve your debt/income ratio above)
Interestingly, if you have sufficient equity in the first house, this can be a way of leveraging that equity and buy in some rental income generating properties! Would be nice to be able to do this in depressed market such as this and then sell out at the top
I will think about this
Be careful when levering up. Would a vacancy adjusted rent cover the mortgage on your co-op? If not move on. No need to lever up for negative cash flow. Hoping to sell at a higher price is speculation (vs. investing)
Nick
_________ matters.
Thanks for the info
@ Kim – Sounds like a great way to buy a home.
@ Arohan – We have no mortgage on our current home so we could use it’s total equity to borrow. Still, the renting part can be tricky for us as our development has rules for who can rent.
@ Nick – I hear the speculation part. Prices can just as easily go down more in two years time.
In all this was an idea that our accountant told us. Not sure if we’ll do it. We have a LOT to figure out besides just buying a home. Still, it’s something for us to consider.
Have you factored in the cost of property taxes, maintenance fees, and insurance?
These are the areas people don’t think about when it comes to having two properties.
You also need umbrella insurance for your “rental” to protect yourself from any liability issues with your tenants.
I would suggest talking to a real estate attorney what your legal options are in this matter.
It can help in the mid term but not necessarily a short term solution.
@ LocoMono – Great advice! This is one of the reasons we haven’t bought a house yet – all of the additional costs that creep up.
If we went through buying a house this way we’ll definitely take your advice and consult a real estate lawyer. Thanks!