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Old 06-03-2013, 07:39 PM
 
2,149 posts, read 3,904,972 times
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Basic info:

Bought a condo in DC in 2011 for $199K.
Current estimated value is $230K.
Thinking about a townhome in 2015, where I would have built enough equity to maybe purchase a second home, while renting out the condo.

Good idea or bad? DC probably has a housing bubble, there doesn't seem to be any decrease in home prices or value any time soon, so even if the value of my home stays the same, I would have paid another $25K in payments between now and first quarter 2015, that I'd have about 70K in equity. Am I understanding that correctly?

So I guess my question is, would it be recommended to take out a home equity loan or an equity line of credit, and do people normally do this? I've already set up a meeting with my realtor in a couple of weeks, but I'm impatient lol and I've had this idea swirling in my head pretty much ever since I closed on my condo. I don't want to rush into anything, but I do know the next home I want to get will be a townhouse or a single family home and it will be my home for good.

I also think it's way too early for me to be talking about this but I actually called the development company that are constructing the townhomes I'm interested in, and they'll deliver by July 2014 but have already sold a couple that won't be ready until August of next year so yeah....there's that.

Any advice is greatly appreciated, thanks for reading.
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Old 06-03-2013, 07:58 PM
 
Location: NC
502 posts, read 822,468 times
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Well, first, you have to see how much of your payment is actually going to the principle of the loan. If your actual payments are $25K, then little of that is going to reduce the principle.

Ex. if you borrowed $199,000 at 4% then after 4 years of payments, you would still owe about $185,000. Only $15,000 in equity plus what you believe it's current estimated value is. So, $45,000 - not $70,000.

Past that - I'm not sure I understand your plan. You want to borrow the equity in your current condo to use as a down payment for the second condo? You would then basically have 3 payments - the first condo mortgage, the first condo equity line, and the second condo mortgage. Can you cover all of that? What if the first condo doesn't rent right away or what happens between renters? Do you have significant cash on hand to cover it all? I'm guessing maybe not since you want to use equity as your down payment.

Also, where did you get the current value of $230,000? That's a huge increase in value in less than 2 years!! Either you got a deal, the DC market has exploded or you are off on your estimation.

In any case, you sound like you are quite a ways away from making this a reality. At the very least, you should focus on saving as much money as you can so you can have a cushion if you are able to rent the first condo and buy a second.
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Old 06-03-2013, 08:52 PM
 
Location: East of Seattle since 1992, originally from SF Bay Area
37,028 posts, read 67,495,956 times
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Also consider the 6% commission, and any work that has to be done to make the sale after inspections. I would consider $199k to 230k pretty small appreciation to afford a 2nd home unless you have a lot of savings to add to the down payment and a very good income to qualify for another mortgage
without having a long term tenant lease. Do the math, and wait to see what
happens to the market there, and meanwhile, see if you can throw some additional cash on your payments toward the principle. After only two years you have probably not even made a small dent in the original $199k.
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Old 06-03-2013, 08:55 PM
 
2,149 posts, read 3,904,972 times
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Quote:
Originally Posted by jojow View Post
Well, first, you have to see how much of your payment is actually going to the principle of the loan. If your actual payments are $25K, then little of that is going to reduce the principle.

Ex. if you borrowed $199,000 at 4% then after 4 years of payments, you would still owe about $185,000. Only $15,000 in equity plus what you believe it's current estimated value is. So, $45,000 - not $70,000.

Past that - I'm not sure I understand your plan. You want to borrow the equity in your current condo to use as a down payment for the second condo? You would then basically have 3 payments - the first condo mortgage, the first condo equity line, and the second condo mortgage. Can you cover all of that? What if the first condo doesn't rent right away or what happens between renters? Do you have significant cash on hand to cover it all? I'm guessing maybe not since you want to use equity as your down payment.

Also, where did you get the current value of $230,000? That's a huge increase in value in less than 2 years!! Either you got a deal, the DC market has exploded or you are off on your estimation.

In any case, you sound like you are quite a ways away from making this a reality. At the very least, you should focus on saving as much money as you can so you can have a cushion if you are able to rent the first condo and buy a second.

I based my estimate on Zillow/Trulia as well as comparables. For example, a condo in my building that is smaller sold for 265K last month. It's 571 square feet or something.

You hit the nail on the head, the plan was to borrow the equity of my current condo to put a down payment on a townhouse. I live in a pretty walkable area, 3 minute walk from the monuments, national mall, there's a subway/pharmacy/supermarket within a block from me and I live about a half mile from the new baseball stadium, so finding a renter shouldn't be a problem and it is DC, rent prices are outrageous here, and people always want to live in the city regardless of where it is, but you never know.

My plan for the next 18 months is to build that cushion like you suggested, which is why I had a targeted date of 1st half 2015.

BTW, just checked, my original loan balance was 193K, not 199. Forgot I put down the 3.5%. It's a lot and I'm probably unrealistic in my goals, which is why I asked the board! LOL
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Old 06-04-2013, 07:12 AM
 
3,330 posts, read 6,762,087 times
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It's called leverage. In good times investors who aggressively leverage do very well. In bad times they lead the way to bankruptcy court.
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Old 06-04-2013, 08:17 AM
 
2,149 posts, read 3,904,972 times
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Quote:
Originally Posted by rational1 View Post
It's called leverage. In good times investors who aggressively leverage do very well. In bad times they lead the way to bankruptcy court.
Are you suggesting I have none or?
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Old 06-04-2013, 08:48 AM
 
4,567 posts, read 9,771,747 times
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Quote:
Originally Posted by jojow View Post
Also, where did you get the current value of $230,000? That's a huge increase in value in less than 2 years!! Either you got a deal, the DC market has exploded or you are off on your estimation.
Yep, DC market is on fire. Has been for awhile. It's one of the few places in the country with jobs. Your federal tax dollars at work.
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Old 06-04-2013, 09:06 AM
 
2,149 posts, read 3,904,972 times
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Quote:
Originally Posted by 399083453 View Post
Yep, DC market is on fire. Has been for awhile. It's one of the few places in the country with jobs. Your federal tax dollars at work.
This is the reason why I'm looking into all of this to see if its doable. Nationally, the housing market may be down, but here it's like the recession and the bubble bursting never happened. You see cranes everywhere, 1 bedroom condos that are probably 650 square feet sell for close to 300K. It's insanity. Finding a renter shouldn't be a problem, it's figuring everything else out.
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Old 06-04-2013, 10:12 AM
 
4,567 posts, read 9,771,747 times
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The gravy train won't last forever in DC, and when it goes downhill, it's going to hurt. The government will need to cut back at some point and those up and those neighborhoods are just going to be hoods. History always repeats itself.
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Old 06-04-2013, 12:03 PM
 
5,075 posts, read 10,025,324 times
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Quote:
Originally Posted by 399083453 View Post
The gravy train won't last forever in DC, and when it goes downhill, it's going to hurt. The government will need to cut back at some point and those up and those neighborhoods are just going to be hoods. History always repeats itself.
The government cutbacks started years ago.
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