When you’re considering expanding your investment portfolio to include rental properties, it’s a good idea to take a critical view of what you’re considering doing, and think twice about it. What’s more, if it would be necessary to take out a second mortgage to finance a rental property, you probably shouldn’t. However, there may actually be times when it wouldn’t be so bad to go into hock a little bit for that extra monthly income. It depends primarily on your circumstances, obviously, but do you think your finances can handle taking out a loan, even if its on an income property? Check out these indicators to when you should and shouldn’t consider signing a second property loan.
Let’s hit the big one first, that you should want to take out a loan at all for an income property. Ideally, income properties should only be purchased with cash, apart from your other investments, and only if you’re ready for all the expenses that are to be incurred by such a purchase. At the very least, your primary mortgage should be paid off, since a rental property can be a major drag on your budget, and you won’t want to endanger your primary residence to invest in a property that may only earn a few hundred dollars per month when all is said and done. So, tip #1 is don’t take out a second mortgage to buy a rental property. It’s bad news, and can get you into trouble.
Second tip is to be careful what loan you get if you do get a loan. It has to have a low enough monthly payment to be worthwhile to rent out given the competing rental prices in the area you’re thinking of buying in, but you need to also factor in a monthly expense allowance to cover repairs, taxes, and insurance. If you’re not making a profit, there’s no point, right? There’s also upkeep such as landscaping, potential security fees, HOA fees, and other expenses. Make sure you don’t overlook these, plan the mortgage accordingly, and if you can’t make a good profit, then don’t buy.
Another thing to consider is that your property may not always turn a profit. There will be times that the unit is empty, and there’s nothing you can do about it. Additionally, There may be fluctuations in the rental market that force you to lower your rent. Make sure that you plan for these changes, and give yourself a margin of safety so that you don’t overextend yourself on a rental property mortgage that simply isn’t making money. Again, the problem here is that you may find your primary residence endangered by a rental property mortgage, and you really can’t afford to let that happen. Be smart about your rental properties, and you’ll be much more likely to earn money with them, rather than seeing them drain your savings down to nothing.