I have equity in my home, now I want a multi-plex. How do I get there?

Case Scenario:

You are a single person with a home you have owned for 7 years.  You have roughly $100,000 in equity and you would like to buy a four unit multiplex.

How should you go about it?  Take out a 2^nd with a mortgage broker or a direct lender bear in mind that the higher the loan to value ratio on your home will be, the higher your rate will be.  That becomes your down payment and you can purchase a 4 unit rental in the price range of $400,000 to $500,000.  I would be inclined to go higher and get larger units with nicer amenities such as 3 bedrooms in combination with 2 bedrooms, garages and fireplaces.  This makes the units attractive to a higher priced tenant and gives you ability to push rents as a nicer unit.

What are the pros and cons of this scenario?  Borrowing the equity in the form of a 2nd could increase the debt service “against” the 4 plex so that you do not have any cash after debt service.  Benefit in foreseeable future would be write off and increase cash flow with pushing of rents at turnover or on an annual basis.  4 doors require more energy than 1.  Harder to sell a multi family in a pinch.  Harder to tap the equity of the rental, if not impossible, without refinancing first mortgage.

What if you want to turn your home into a rental?

John and Diana own their first home.  It is a 2 bedroom and they have outgrown it.  It is in an up and coming part of town that is close to transportation.  They have grown to like the area but they can’t stay, they need something bigger.

Solution:  Qualify for a new owner occupied loan with lender.  Take any equity necessary from the existing home for the down payment on the new house and potentially additional reserves. 

Once qualified for the new home, begin shopping for it.  At same time ready existing home to become a rental.  Fix all maintenance items and attend landlord classes.  Become familiar with the landlord documents.  Meet with an attorney and create an LLC.  Once moved in to the new home, clean and advertise the prior home.  Taking applications, until one passes screening criteria.  Transfer title of prior home into newly established LLC.  Meet with tenants to accept rents and deposits in verified funds.  Do paperwork and take photos at move in.  Follow up in a week for a punch list and get with the mentor for guidance along the way.

In a matter of years John and Diana will have the opportunity to revisit additional leverage to purchase additional rentals, if desired.  They will have landlord experience to qualify for investor homes, or they can repeat the process, buying another owner occupied residence.

Learn more tips like these by attending Landlord Study Hall www.landlordstudyhall.com.

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