Outgrowing your current home?
Ready to Move-Up?
Want to keep your current asset?
Written by: Robert Hilton
March, 2024
Here’s a scenario for you: My wife and I purchased our home 10 years ago in a desirable neighborhood. It’s a three bedroom, two bath home with 1600 square feet. At the time, we had one child, two cars and no pets. Fast forward 10 years and we now have 3 children, 3 cars, a boat and a dog. We’ve outgrown our current home and are ready to move up to a larger home closer to the middle and high schools where our children will be attending.
Problem: While we live comfortably with our current income, it hasn’t left much room to save for the next home. As such, the bulk of our down payment lies in the equity of our current home. Also, we have been looking around the area we want to live in and have found a wonderful, newly built home that is ready to move in within the next 45 days.
Solution Option 1: Most people in this situation would choose to list their current property, sell it, and then use the equity as a down payment for their new home purchase. This may be their best “KNOWN” option. If the market is saturated with inventory of pre-existing homes, the time it takes to prepare the home for sale, list it on the MLS, market it on the local property tour – may be time prohibitive. There is a certain amount of stress that goes along with making an offer to purchase the next home while still carrying the debt of the current home. There is also uncertainty caused by the market which may lead to offers being delayed. These conditions could pressure you to receive lower than the acceptable price to close on-time and complete the purchase of your new home. Or worse yet, you’ve agreed to one of the move-now, sell later options in the marketplace. That option will generally yield less money to you after the sale.
Solution Option 2: If your situation allows, why not hold the current real estate asset, rent it to others and then purchase the new home as well. This allows for conditions which may have you gaining equity in two properties. Billionaire Andrew Carnegie famously said that 90% of all millionaires got their wealth by investing in real estate. If you’re wondering how to achieve this goal to build long-term wealth using real estate, let’s explore a second option. I’ll refer to this concept as “accessing equity without selling”, or AEWS.
Ultimately, you will use the income from your current home being rented to others to qualify for the primary mortgage on your new home purchase. Treating this as a business, you will rent your former house to a qualified tenant and the rent provided becomes income to you. The income received will serve to “offset” the expense of your real estate mortgage on that property.
Accessing equity without selling first assumes that there is equity in your current real estate investment. We at Robert Hilton Realtor can help you determine how much equity, if any, that you currently have in real estate. It’s a simple calculation using comparable homes sold in your immediate area to determine an average sales price for homes of like kind and quality. Once we determine what the average sales price is, we subtract that value from your current home loan. The balance will equal your current equity position.
Next, you can apply for a Home Equity Line of Credit (HELOC) to access the equity without selling your current home. In general, the minimum credit score for a HELOC is 700 FICO. The higher your credit score, the lower your interest rate will be on this loan. Experienced mortgage broker/lenders may encourage you to qualify for the maximum equity available in case you have repairs to be completed before renting your property to others. Qualifying for the max amount doesn’t necessarily mean that you’ll withdraw the max amount.
Once the HELOC is in place, then it’s time to secure a signed lease agreement for your current property. Here at Robert Hilton Realtor, we are experienced in preparing your property for lease. These steps include: listing the property, marketing it to the public, screening tenants and ultimately securing at least a 12-month lease. Once secured, we’ll help collect the first month’s rent and a security deposit to show the establishment of your investment property business.
An experienced mortgage broker/lender will help you with a list of acceptable documents necessary to qualify for the new home loan. We have excellent resources available to us and are eager to refer more than one option to select from.
Once you’ve been approved for the new home loan, it’s time to start packing!
Ready to learn more? We’d love to serve you!
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