Cold reality of a hot investment

Using current home's equity for next purchase can be risky


Jeff Ciesla had watched people making money in the real estate market long enough.

So, when he and his wife, Quinn, recently decided to trade up to a larger home, he made his move. Instead of putting their Canton rowhouse on the market, the couple cashed out $22,000 in equity to buy a Harford County townhouse with double the space and kept their city house, betting that its value would continue to grow.

"We had the conversation of wanting to buy a big single-family home, but we'd basically pay the mortgage and be house poor," said Jeff Ciesla, 29, a pharmaceutical sales representative. "We decided, why don't we keep this place a little while? We'll be getting rental income, and people will help us pay off the mortgage while the place continues to appreciate."

With home values rising and interest rates still relatively low, more homeowners like the Cieslas are hanging on to their current houses. Rather than following the traditional move-up pattern of selling one house to buy another, they use their swelling equity to cover the down payment and closing costs, rent out the first house and figure that in a few years they will be able to cash in big time.

But there are risks to "leveraging up," piling on debt based on the value of property on paper - money that isn't real until the house is sold. Some buyers compound the game of roulette by using interest-only and adjustable-rate loans and counting on getting out with a substantial gain before their mortgage payments balloon beyond their ability to pay. And regulators worry that the practice could increase volatility in the hot housing market.

"It's been going on the last 18 months to two years, especially in the suburban markets," said Kenneth R.C. Wenhold, director for Maryland and Virginia for Metrostudy, a national real estate consulting firm that tracks market trends. "Just through appreciation, they can qualify for the bigger home."

A 2004 survey by the National Association of Realtors found that 9.4 percent of homebuyers - about 638,000 - planned to keep their residence when they bought their next house, according to Walter Molony, a spokesman for the organization. That survey question is not one routinely asked, so comparative data were not available for prior years, he said.

Realtors say there is plenty of anecdotal evidence that people are taking advantage of healthy appreciation and low interest rates to become dual homeowners.

That's because it makes sense, said Barry Glazer, a broker for Century 21 Downtown.

"What makes it appealing is the real estate market is doing so well," he said. "If you can offer a cash contract, it puts you in a much better negotiating position. A lot of these contracts fall through, so if you've got a sure thing, that's sometimes worth several thousand dollars."

Real estate's current status as a hot investment is drawing homeowners who in the past would have never considered keeping their current house, said Pat Hiban, broker of Pat Hiban Real Estate Group.

"It used to be only a small percentage of people used real estate as an alternative investment vehicle," Hiban said. "Now it's the masses."

That's fostered a newfound comfort level. The idea is, "Everyone is doing it, so it's safe," he said.

Also a factor in the equation is that rental prices haven't escalated at the same pace as home prices. That makes renting an attractive option for many people, increasing the likelihood of finding tenants.

"Rentals haven't kept up with the housing market," said Scott Smith, a Realtor in Baltimore and Baltimore County for Keller Williams Realty.

Location still key

Properties in hot locations with strong demand command good rents, he said. He gave neighborhoods such as Federal Hill, Canton and Locust Point as areas where rentals are at a premium.

While Baltimore's rapidly rising home values - the average price of a city home last month was up nearly 30 percent from a year earlier - gave the Cieslas the leverage to become dual homeowners, the couple is counting on the rental market to make their plan work.

The Cieslas bought their rowhouse on South Curley Street in Canton for $165,000 in 2002 and used a $35,000 home equity loan to add a master bedroom and bath addition. The home was recently appraised for $335,000, Ciesla said.

When the couple decided to buy a three-bedroom, 2,300-square- foot Bel Air townhouse for $273,500, they took out a new interest-only mortgage on the Canton house. That covered their remaining $192,000 debt on the Canton house plus the money they needed to cover a 5 percent downpayment and closing costs, Ciesla said.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.