Step 7: And the Beat Goes On – Buy Another Property!

Go Back, Jack, Do It Again!

So, what is the next move? Now you are going to buy another house! That’s right – you’re gonna go back, Jack, and do it again! Look for a house that is in your price range – again, roughly twice the amount of your yearly realized income. Or alternatively, three times your gross income, as long as you have at least a 20% cash down payment. Again, the payment of principal, interest, taxes and insurance should be no more than one third of your monthly gross income.

Getting a Home Equity Line

Remember, as discussed above, the only time you should borrow against a home equity line is for (1) a major improvement on your home or (2) for purchasing another piece of real estate. Well, now you are purchasing another piece of real estate. So, now let’s go about the process of getting a home equity line. 

This time the paperwork will be completely different. The bank will want to see two things: (1) how much the first house is worth based on an independent appraisal of the house and (2) how much is still owed on your first house. That is why it is so important to eliminate the debt on your house as soon as you possibly can.  Because the difference between what the house is worth and what you owe on it determines the amount of money that you can borrow against it. 

How Home Equity Lines are Set Up

Look at it from the bank’s point of view. If you own a house worth $500,000.00 and you owe $500,000.00 on it, there is no room for the bank to lend anymore against that house. However, if the house is worth $500,000.00, and you owe only $300,000.00, then there is $200,000.00 equity in the house. If you get a loan, and then don’t make the payments, the bank can foreclose on the loan, take the house, sell it for $500,000.00 and pay off the first loan of $300,000.00, and get the second loan of $200,000.00 back. The bank only sees the transaction in terms of whether they will get their money back. So, if you want to play the real estate game, make as big of a payment as you can as often as you can on your mortgage, so you can later borrow against the house, to buy another piece of property. 

Exercise Caution: Borrow As Little as You Can and Get as Much as You Can for the Money You Borrowed

Be careful, though. This time you will have to budget for the repayment of the home equity line into your housing costs for the new property. The home equity payment needs to be considered when you are calculating how much of a monthly payment you can handle for the next house. 

The Loan on the New House

If you rent out your first house, you have to move somewhere else to live. So, you have to buy something new. The best situation is that you have so much equity in your house that you can simply borrow the full amount of the cost of the new house. In this case, you would simply get the home equity line, borrow the full cost of the new house, and then simply pay the home equity line back. In this case, the bank knows that it can simply foreclose against your first house, if you dont pay the loan back.

However, if you still need to borrow to buy the new house, you have to go back to lending game in order to get a new loan. Call your broker –the person in your back pocket whenever you need a loan. To finance another loan for your second house, you will need to show you have a steady source of income and sufficient documentation of that income. Get the documents you need to prove your income to the bank — pay stubs, bank statements, tax returns.

Just like for the first house, you need have at least a 10% cash down payment of the purchase price of the house. A 20% is preferred, but you will qualify for a loan with a 10% cash down payment. However, as immediately described above, this time the downpayment will come from the home equity line.  

On the loan for the second house, borrow no more than twice your gross unrealized income. In the alternative, you can use the ratio of three times your gross income, but then you must have at least a 20% down payment.  

Again, get a fixed rate loan. Try to go for the best fixed rate mortgage possible. As always, Avoid the Adjustable Rate Loan! No exceptions of any kind of that issue!  Finally, the principal, interest, taxes and insurance should be no more than one third of your gross income. Same stuff as before. 

Yep, It’s Time to Do It Again 

Move into the new house and rent out the first house, meaning, pay back the home equity line on the first house as soon as you can. Fix up the new house. On the mortgage on the first house, make as big of a payment as you can, as often as you can. One day it will paid off completely. Then, on the second house, once the rental rates exceed the mortgage on your second house, move again and rent out the second house. Repeat this scenario until the rental income has reached a point where your overhead is covered by the income stream from the rentals. 

Now it is true that you have to keep moving every time you make the next investment.  Well, that’s life, isn’t it? You have to make some efforts and be inconvenienced once in a while in order to have long term wealth. Moving every six to ten years is the price you pay in order to work this particular wealth strategy. But, you can stay within the same area, if you like your town or don’t want to change the kids’ school. You don’t have to move too far from where you currently live in order to do this method. In fact, it is better to be close to your rental properties.

The goal is to acquire your first passive income stream and repeat the process until you have as many income streams as will cover your cost of living so that you do not have to work to live. The beauty of this system is that you live in a nice house and have a nice life. The house then turns into an investment. But you had the benefit of living there first, and you know all of its problems and are familiar with how to fix them. You know what kind of experts you need to maintain the house. Your time and your standard of living are just as important as becoming wealthy, and this method allows for a high quality of life. Chart a course for your future.  Begin today. 

Now you have two homes. What is the next wealth move? Read on to find out!