Investing in real estate can be a great way to help you grow your personal wealth. Since most people don't have enough cash available to purchase a secondary property in full, a mortgage will probably play a part in the equation when determining which property will yield you the greatest return.
To ensure that you take out a mortgage on the right property, give the following three factors some thought before purchasing your first investment property.
1. Calculate Expected Rental Income
An investment property is often rented out to help generate income. If you are planning to rent out your property once the purchase is complete, it can be beneficial to know how much you can charge potential tenants.
Research rental rates in the neighborhood of any property that piques your interest. When you know the expected rental rate, you can determine which mortgage loan will allow you to achieve a monthly payment that will be covered in full by the rental income the property generates.
2. Factor in Additional Costs
There are some unexpected costs that can arise when you are purchasing a rental property. In order to make the property appealing to potential tenants, you may need to invest in some upgrades and cosmetic changes.
You will also need to determine if you want to manage the property yourself, or hire a management company to handle the day-to-day management on your behalf. Each of these unexpected costs can affect the profitability of the property each month.
Be sure that you keep the mortgage payments on an investment property as low as possible so that you will be able to pay the loan payment and cover any additional costs associated with the property without taking a financial loss.
3. Evaluate Mortgage Restrictions
Purchasing an investment property can differ from purchasing a primary residence. Since you will not be living in the property yourself, you may find that lenders are more strict about their qualifications for an investment property.
You may be required to pay a larger percentage of the purchase price as a down payment when financing an investment property, and you could be asked to provide extensive financial records to prove that you will be able to make a sizable down payment.
The interest rate for the mortgage on an investment property may also be slightly higher than the interest rate you pay on the mortgage for your primary residence.
Talk to a home mortgage company for more information on financing an investment property in the future.