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Strategies of Buying and Selling Simultaneously
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You may have found yourself in a position where you would like to buy one property while simultaneously selling another property. While doing this does present some unique challenges, it's completely possible to pull this off with the proper strategy and some degree of flexibility.
The reasons and strategies for wanting to buy and sell simultaneously will differ from a primary homeowner looking to relocate to an investor seeking to execute a 1031 exchange to avoid capital gains taxes. In either instance, it's important to have a sound strategy and understand what the undertaking will involve.
Selling A Primary Residence While Buying Another
There are several different ways to do this and how you do it will depend on your financial philosophies. There isn't necessarily a right and wrong way to approach this, some consider selling their home first the priority and then are willing to rent for a period of 6 months while they find the perfect replacement. This is usually the lowest stress avenue.
Some will be intent on executing the sale and purchase in such a way that both properties close in close succession to remove the extra step of renting. Money is a huge consideration for this move, particularly when financing is involved. In many instances, sellers will need the equity from the sale of their home to fund the down payment on the purchase of the second.
If Financing is Necessary, Get Prequalified for a New Mortgage First
Before you get serious about selling your home, you should thoroughly research the possibility of buying a new primary residence. The Maui housing market can change rapidly at times, and the lending environment is changing as well. When you get prequalified with a local Maui lender, you can better determine your price range for a new home.
You can get accurate information about the interest rates available for your credit score and other qualifications. In addition, you can confirm that you can afford the loan payment for the size and quality of the home you are interested in.
Discuss Your Plans with a Real Estate Agent
After learning about your prequalification status, consulting with real estate agents in Maui is the next step. An experienced Maui real estate agent can help you determine how long your home may reasonably remain on the market.
In addition, you can get details on a realistic sales price. By analyzing the sales price in combination with closing costs and the current mortgage payoff balance, you can determine the sales proceeds that you have available for a down payment on your new home purchase.
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Apply for a Home Equity Loan
While you may ideally want to sell your current house before buying a new one, this may not be an absolute requirement for some sellers. You could tap into your home’s equity by applying for an equity line of credit. Before moving forward with this possibility, be aware that the payment on the new home equity line will affect your debt-to-income ratio.
Mortgage lenders review your debt-to-income ratio as part of their qualification process. Because of this, you should discuss this option in detail with your lender to ensure that it will not impair your ability to qualify for a new mortgage.
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Consider a Bridge Loan
When looking at how to buy a house before selling yours, a bridge loan may be a great solution. A bridge loan, a short-term loan with a higher interest rate, can be used to refinance your current home mortgage or pull equity out as a second lien.
With interest-only payments, you can tap into your equity to use as a down payment to purchase a second home. You can also potentially decrease your first home’s mortgage payments, which will be beneficial if the closing dates do not align perfectly.
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Choose a Low Down Payment Loan Program
While many mortgage lenders will require you to make a sizable down payment when you buy a house, there are lending solutions available that allow you to put down 5% or less. A Fannie Mae loan, for example, only requires 3% down. While the interest rates on these loans are competitive, you may be responsible for Mortgage Payment Insurance (MPI).
MPI could add hundreds of dollars to your monthly mortgage payment. With a low down payment loan, however, you may not need to access your current home’s equity to complete your purchase.
Borrow Against Your Retirement Account
Generally, your retirement account’s funds are inaccessible to you until you reach the age of 59.5 years old. Most withdrawals taken before you reach this age can trigger a penalty and will be taxable. However, the IRS allows you to withdraw funds without penalty to buy a house.
There are specific rules and requirements that you should research thoroughly before pursuing this option. Your retirement account funds can be used for a down payment as well as closing costs, and this could eliminate the need to sell your house before buying a new one.
Add a Contingency to the Sales Contract
If you have determined that the other options available are not suitable for your unique situation, another possibility is available. When considering how to buy a second home without selling the first, a sales contingency could be written into the new sales contract. A sales contingency can be worded so that your purchase is dependent on the sale of the current house.
While this can seem like the perfect solution, be aware that many sellers may not accept this contingency. Like you, other sellers may be trying to sell their house to buy another property. If they delay their sale because of a sales contingency, they may not be able to structure their own timeline to suit their needs. Your real estate agent can work with you to structure a sales contingency with an agreeable seller.
Turn Your Home Into an Investment Property
If you are concerned about the possibility of having two mortgage payments at the same time, you could consider renting out your first home. The monthly rent from your rental property could cover its mortgage payment, property taxes, and other expenses. The remaining rental income is a profit that can be used as desired.
If you are unable to qualify for a new home loan for your purchase with the old mortgage in place, renting the property can help. Once you have a signed lease in place on your first home, your mortgage lender can apply that income to your debt-to-income ratio.
Before turning your home into a rental, consult with your realtor. Your real estate agent can provide you with a fair market rental rate for the property. This information is required to determine if its monthly rent will cover its expenses. The IRS allows you to write off many property expenses, including upkeep costs, management fees, property taxes, etc. Depending on the situation, a property owner could possibly turn a profit on a rental house while enjoying a tax loss.
Consider Buying a Second Home
Buying a second home has advantages to consider as well. If you buy a second home, you can enjoy traveling back and forth between the locations as desired. When you are not using a home for personal use, you could rent it out as a rental property. A second home also has tax benefits.
Even if you do not use the second home to produce rental income, you may qualify for the same homeowner tax deductions as you benefit from with your first home. Before buying a second home or turning your current home into a rental property, consider speaking to a tax advisor and a management company to explore all of the financial ramifications in detail.
Executing a 1031 Exchange
When doing a 1031 exchange, you'll typically be selling the property you are going to exchange first and then immedietley seeking a replacement property. Read my full rundown on how to successfully navigate the process here.
Explore Your Options Today
Keep in mind that you can combine multiple solutions presented here as you walk through the real estate process. For example, you could take out a home equity loan on your current home to access down payment funds to purchase your second home. At the same time, you could turn your first home into a rental property to generate monthly income.
This example is only one of many ways to combine these solutions and set up a scenario that suits your needs. Contact a local real estate agent to learn more about the housing and rental market.
Get In Touch With Evan!
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Evan Harlow ranks among the best real estate agents on Maui annually and is in the top 1% of Coldwell Banker agents worldwide in production. Evan has the expertise, experience, and work ethic to help you achieve your real estate buying and selling goals. We promise exceptional service and support from the beginning of the process through closing and beyond. See what Evan's clients are saying on Google.
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