If you’re buying an investment property so that you can rent it out or lease it to other people, you will be holding the mortgage loan in your name for some time. The lower your monthly mortgage payment, the more profit you stand to make from the rent you collect every month.
Bottom line, you want the lowest mortgage rate possible.
This means you will want a fixed-rate mortgage and will want to put down the highest downpayment possible.
What if I plan to purchase additional properties?
It is fairly common to see a single buyer routinely purchasing additional investment properties with the intent of renting them out. If you feel you do, or may at some point, fall into this category, make sure the mortgage lender you want to work with will finance a higher number of properties with you. There are many national lenders who will only finance up to 4 investment properties. Others mortgage companies will handle up to 10. When shopping for a mortgage lender, it’s important to choose one that will handle the amount of properties you would like to invest in.
How can I determine if it’s a good investment property?
Before you decide on buying a home in order to lease it out, make sure you’ve run the number using a mortgage payment calculator and can afford the property. Basically, the most important thing is to calculate the minimum rent you’ll have to charge in order to break even on your investment.
If the average rent in that particular area for a similar home is $1,000 and you think you can get $1,500, that’s great. But base your investment on the worst-case scenario: the minimum you can charge and stay afloat, not the maximum you think you can get.
If you could potentially make the monthly mortgage payment, pay the taxes, and handle the associated costs of home ownership while charging only the minimum average payment for that area, then you’ve probably found a good property and a solid investment. Obviously, the larger the difference between what you can ask and what you must pay, the more you make every month while the home is rented. Nevertheless, you should always be prepared for the reality that you may be forced to ask for less than you originally anticipated depending on the housing market.
What mistakes do most first-time property investors make?
This one is easy. Running the numbers also means factoring in an amount of time when the property may be empty. Banks generally factor in a vacancy rate of around 25%. Remember that even when no one is leasing the home, you will still be paying the monthly mortgage payment and associated taxes on that home. If you cannot afford to foot that bill on your own for 25% of the time, you may want to look for a different property, or consider flipping the home instead.