Denver Home Living Huettner Capital Winter 2017/18 | Page 35

TODD HUETTNER
HOW TO BUY A NEW HOUSE
AND RENT YOUR OLD ONE
O
ne of the best, yet most overlooked, real estate
investments is to turn your current home into a
rental when you buy a new home. You already
know the property and the neighbors, and you
already have great loan terms. The problem is how to buy a
new house without selling your current one. It is not as hard as
you think. Here is what you need to know to make it happen:
DOWN PAYMENT
You can put down as little as 3.5 percent. However, many
people want to put down more to avoid mortgage insurance.
Here are your options for coming up with a down payment:
• Savings/Money Market – The easiest
option, but you still want some reserves.
• Current Home – You can liquidate equity in your
current home with a new first lien or a home equity line
of credit. While you can do this at the same time you
buy a new home, there are several advantages to doing
it in advance, so don’t wait to plan out your options.
• Borrow from an asset – Many assets other than
your current home allow you to borrow against
their current value. Stock and bond portfolios, life
insurance policies, and 401(k) plans allow you to
borrow against their cash value. The payments on these
loans is not usually counted against your monthly
debt-to-income ratio either. Just be careful that you
understand the costs and risks of this option.
• Sell an Asset – Selling another asset investment is an
opportunity to diversify out of other asset classes or turn
that boat you don’t use that much into an investment.
• Gift – Many programs allow the entire down payment
to come from a gift from a family member.
DEBT-TO-INCOME (DTI) RATIO
Your DTI ratio is the percentage of your monthly income
that you spend on housing, credit cards, loans, and any
other recurring payments like child support. Rules vary,
but it can be as high as 50 percent. You can even count
future rent from your current home as income when
applying for the new loan, in many cases. Be careful because
some programs limit your DTI ratio to 36 percent.
RESERVE ASSETS
Even though a traditional loan may only require one or two
months of loan payments in “reserves,” I recommend you
have six months’ worth. These assets can include anything
from checking/savings accounts to stocks, bonds, retirement
accounts, and cash value on life insurance policies. Be careful
because some programs require up to two years of reserves.
LOAN TYPE
In my opinion, a rental property should be a long-term
investment that generates consistent cash flow. Therefore,
you should only consider a fixed-rate, fully amortizing loan.
An adjustable rate mortgage, where your largest cost can
double, simply does not make sense. Get a 30-year loan if
you want a low monthly payment and more cash flow from
the start. A 15-year loan offers a lower rate while the higher
monthly payment acts as forced savings. Another benefit
of a 15-year term is paying off the loan sooner if you want
a lot more cash flow in 15 years when the loan is paid.
Turning your current home into a rental when you buy
your next home is a great investment. Although you can
use flexible loans for buying your new residence, it is a more
complex transaction that requires an experienced lender.
You also need to take the next step in planning and decide
if you want to hire a property manager or do it yourself.
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