Is investing in rental property a good way to build wealth? In today’s post, we’ll review some of the pros and cons of rental property investment and highlight some options for financing.
Individual Investors are Eyeing Rental Homes
According to data released in 2017, close to half of all rentals (47%) were owned by individual investors. With a significant portion of the population feeling hesitant about investing in the stock market, and home values continuing to climb across the nation, investing in real estate seems to make perfect sense.
Why Invest in Rental Property?
Extra Cash Each Month
One of the most common reasons people decide to invest in rental property is to generate extra income. In theory, wise investors will purchase a property at a reasonable price, typically with at least a 20% down payment. They will then rent out the home and the tenants’ rent payments go toward paying the mortgage.
If you’re investing in an area where rent prices are higher than mortgage payments (which is the case throughout much of the country), you have the opportunity to not only gain equity in your rental home, you could be making some extra cash each month to use as you please. For example, if the mortgage payment on your rental property is $1,000/month, but the average rent for a home in your area is $1,500/month, you could be gaining an extra $500/month.
Long-Term Equity Growth
Even if you cannot realistically charge much more than your mortgage payment, investing in rental property may still be a good idea for long-term gains. For example, if your mortgage payment on the rental home is $1,000/month and that is pretty much in line with the average rent in your area, you could charge $1,000/month and still gain equity over the years as your home’s value increases.
Diversifying Investment Portfolio
It’s a commonly held belief that diversifying your investments can help protect your portfolio against significant loss. In other words, don’t put all your eggs in one basket.
Many financial advisors will say it’s a good idea to diversify your investments across multiple different outlets. For instance, let’s say you have investments in stocks/bonds as well as real estate. If your stock market accounts take a hit (like they did for many people during the Great Recession), you’d still have your real estate investments to fall back on. Likewise, if your real estate investments don’t pan out quite like you’d hoped, you would still have your accounts in other investments to hopefully help cushion the blow.
Please note however, what may work for one individual won’t necessarily make sense for every investor. Consult a financial advisor, stock broker, real estate professional and mortgage lender to ensure you’re getting the most accurate information tailored to your specific scenario.
Investment Property Financing
There are multiple options for financing investment property in today’s marketplace. We encourage all consumers to explore the options to find one that works best for their needs and budget. At Luxury Mortgage, we offer a unique loan product designed specifically for rental property investors, called the Investor Cash Flow mortgage.
The Investor Cash Flow mortgage allows eligible borrowers to use the projected rental income to qualify for the loan. In other words, if you’re planning to charge $1,000/month for rent on the subject property, you may be able to use that money to help you qualify for the loan. Through this program, borrowers may find that financing is more accessible than it would be through conventional loans used for rental property purchases. Here’s why:
- No tax returns/employment verification required
- No limit to the number financed
- Loan amounts up to $4,000,000
- Credit scores as low as 580 may be accepted
- Borrow up to 80% of the property value
- Competitive pricing*
Risks and Drawbacks Associated with Owning Rental Property
Ideally, when you purchase a rental property, the tenants pay your mortgage for you and over time, the equity in the property will grow. Similar in concept to a savings account, the home will gain worth over time. However, this is largely dependent on your mortgage being paid consistently and on time, while the value of the property increases.
If you wind up with tenants who aren’t reliable when it comes to making their rent payment, it could put you in a difficult position. Still, there are ways landlords can help safeguard their investments against unreliable tenants and unexpected expenses. Having a solid savings or cash reserve available in the event of emergency repairs, missed rent payments, etc. is always a good idea. Making sure you have a legitimate lease in writing is essential.
Remember, real estate investing can be a great way to diversify your investments, but it may not be for everyone. Explore the options and consult professionals such as a mortgage lender and your financial advisor for more information.
Want to explore other financing options from Luxury Mortgage Corp? We offer a wide selection of home loans and would be happy to help you compare programs to find something that works for your scenario.
*These guidelines are subject to change. Please consult with a Luxury Mortgage Corp. professional for the most accurate and up-to-date loan qualification requirements.
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Stamford, CT 06901