Friend needs advice

hello fellow RE friends,
One of my friends needs some advice on buying his second home while keeping his first.
What is the most effective way, financially, to do this?

he is eligible for 1.5M loan. Currently has 800k loan on the first primary property(worth 1M), paying about 4k per month.
He wants to buy a 1.5M property as his second, keeping his first.
If he can rent out the first home for say 4.5k per month, will he be eligible to go for a 1.5M property?
If so, any other thing he needs to keep in mind before doing this?

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I assume you mean he is eligible for 1.5M loan if he doesn’t have the other 800K loan?

Going with that assumption, he needs about 4450 to cover his PITI (without including repair/maint, and vacancy). Bank will only acknowledge his rental income when he has more than 25% equity and they will only acknowledge 75% of his monthly rental income. So in your friend case, Bank will see this property as negative cash flow so he won’t get 1.5M loan for his primary anymore (assuming he has downpayment somewhere for that). He can get answer on all of these by talking to a lender, just with 15 mins phone call, he can figure out all the exact number for his situation.

But most importantly, can he pay both house mortgages if property happen to be vacant? RealEstate works as long as you don’t need to sell your house in the bad times. And we know that bad times will come, we just don’t know when.

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Yes, thats the right assumption.
Thanks for your analysis.

Few additional points:

You need to have a lease contract at least 12 months, with cashier check for rent + deposit, remitted in your bank account. The underwriter will verify the bank deposit with a copy of cashier check. Then, they account 75% of rent. They are also verify their own rental appraisal for the home so that your friend is not over stating the rent. This is 100% checked.

After purchasing new home, let us assume rental home loan payment PITI is $4000 and new primary home PITI is $6000, you need to have cash reserve 6 months of combine PITI, i.e. 60000= 6 * (6000+4000). They will account 60% of retirement account balance towards 50% of $60000. Still they may expect direct cash reserve (other than retirement account) appx $30000.

Then comes to your DTI max 43% after taking account of rental home (i.e. negative cash flow reduces friend’s eligibility)

It is easy to get the eligibility reduced to 1 M or 1.2M max. I assume friend has 30 year or 10 year or 7 year arm with balance more than 5 years (in arm). If not, they will take worst case scenario interest rate for mortgage rate that further reduces eligibility.

Do not ask me why, it is the way they calculate - most of the big lenders.

Lenders are always conservative.

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I might be missing something, but are there any SFRs (in the bay area)
worth $1M that can actually rent for $4500? Your friend might not want to get over their skis and get stretched very thin…

A lot of $1M properties can rent for $4500 or more. @myo has a few in Daly City.

Ditto what @Jil said and also some lenders won’t look at your estimated rental income from the lease contract unless you have collected rent for at least two years.

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Thanks Jil

Good info, thanks