Should I Buy an Investment Property? What to expect from owning a rental property By Laura Sherman Buying an investment property is a different purchase than buying a primary residence. It is the difference between buying a house and a home. With an investment property, you’re only interested in rate of return. It is purely a business decision. There are various factors that you should consider before buying a rental property. What is the condition of the market? When the market is low, it’s a good time to consider purchasing a rental property. There might be some very good deals out there. If you know you’ll eventually want to get another house as an investment, now is a good time to look. Can I get a mortgage loan? Getting a loan for an investment home is much harder than for a primary residence or a second home. Lenders will not only charge you a higher interest rate, but they’ll expect you to put more money down. In addition their guidelines will be stricter, because their risk is greater. Getting and maintaining renters If your plan to pay the mortgage bill each month hinges on having a renter in the home, you must have a healthy reserves account to cover those months when the home is vacant. On occasion, when you buy a home, there is a renter that comes with the deal. This is a good bonus, but there is no guarantee that they will stay in the property for any length of time. Even if they have a lease, they can break it. Always plan for the worst case scenario. Although some renters stay in a home for years, most won’t. Things can change quickly for people, and despite their intentions, they sometimes must move out suddenly. It can take months to find a new tenant. You can hire a management company, who will put renters in your property, but it might take time for them to find someone. You may have an empty investment home a couple months a year. The eviction process When you become a landlord, you must be prepared to evict a tenant who isn’t paying their rent. Tenants have a lot of rights, making the eviction process long and tedious. During the whole process you will not be collecting any money for the home and they might be actively ruining your property. Before you allow someone to move into your investment home, it is vital that you pull their credit and do a background check. There are many horror stories of people who allowed someone to move in, only to discover that the tenant never had any intention of paying their rent. If a person has prior evictions on their record, their credit report will show it. And any criminal activity will appear on their background check. Without these two documents you’re gambling. Extra expenses and/or time involved Another home means another mortgage, with property taxes and insurance. In addition there will be other costs, just as there are with your primary residence. As the landlord you’re responsible for providing any major repairs. Most people engage a management company, as they handle finding the tenants and maintaining the property. They typically ask for the first month’s rent as well as a percentage of all rent collected. Can I afford to buy an investment property? This is a key question you need to consider. If you plan to buy another home, you should have extra money in your bank account to see you through rough times. I suggest six times your monthly budget. Whatever you do, don’t spend all your money on an investment home, hoping it will all work out. It’s too large a gamble. Some people buy a multi-unit property, figuring that they’ll be financially ahead each month, because the rental income is greater than the mortgage payment. Never count on that. Sure you might be able to fill each unit, but if you can’t, you must be able to carry the mortgage payment or you could lose the home, along with your down payment. Long term investment You should view a rental property as a long term investment. If you can just break even on the expenses, the property should gain value over time. As long as you can stick it out if you lose a renter, you should wind up ahead in the end.
Posted on: Fri, 21 Mar 2014 16:46:39 +0000
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