Financial Answer Center
- Introduction
- Financing Your Investment
- So You Want to Be a Landlord?
- Is Professional Management Right for You?
- Buying the Right Type of Property
- Finding the Right Property in the Right Location
- It's Number Crunching Time
- Uncle Sam: Your Partner in the Deal
- Other Real Estate Investments
- Converting Your Principal Residence
- Some Helpful Hints
Financing is something you should be thinking about before you even begin to shop around for property. How are you going to pay for this one? See the section Getting the Down Payment Together, where you looked at your available resources and what they're doing for you.
Should you go the traditional route of mortgaging? See the section Mortgage Financing.
Once you've taken inventory of the amount you have available to buy real estate, determine which investments you will tap.
Make Sure Your Cash Flow Can Handle It
Even though you might be able to get your hands on the money to purchase a second piece of real estate, your cash flow may be insufficient to meet the expenses that often accompany ownership. Unforeseen expenses are to be expected. Besides mortgage, real estate tax and utility payments, you never know when you'll be faced with repairs that can turn into a major expense.
Before you get too excited about owning another property, determine if your cash flow is adequate to support it.
Step 1: Look At Your Current Annual Cash Flow. This will tell you how much cash you have left over to put towards other expenses. Do not include any income or expenses in relation to the ownership of the new property.
Step 2: Determine Your New Property Cash Flow. This estimate will help you determine whether the estimated rental income will cover the new property's expenses. If you don't plan on renting, you'll have an estimate of how much your total annual expenses will be for owning the property.
SUGGESTION: The amount of rent you can charge usually depends upon the supply and demand in the area. Check with an area realtor to get an idea of the monthly rent you could expect to get for a similar property.
Step 3: Compare your result in Step 1 to the result in Step 2. Fill in the numbers below and see where you stand. If your result is positive, your cash flow is adequate to support owning another property, assuming your estimates are reasonable.
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Net Cash Flow (deficit) |
$__________ |
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Net Cash Flow (deficit) |
$__________ |
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Net Cash Flow (deficit) |
$__________ |
A positive number means that your pocketbook can handle the ownership of a new property; but you should also determine whether you are mentally ready for the challenge.
IMPORTANT NOTE: Remember not to touch your emergency reserve fund or take a withdrawal from your retirement funds. If this is something you are considering, then you are not a candidate to purchase a second piece of real estate.
What If You Don't Occupy The Property?
Most, if not all lenders require that you put at least 20% down on a mortgage that is for a non-owner occupied property. In other words, if you are not living in it, they want to make sure they are not lending you more than 80% of the value of the property. You also find that a higher interest rate is typically charged for non-owner occupied property. The reason banks and credit unions are tougher is that they have been burned by owners that default on their mortgage payments and don't have an urgency to pay because they still have another roof over their heads.
Owning investment property not only requires giving up some of your money, it also requires you to give up some of your free time. Even if you decide not to manage the property yourself, you will be spending lots of time keeping tabs on your new investment.
