Should You Buy an Investment Property?
Real estate makes a smart investment—that part of conventional financial wisdom still holds true. But making profit from real estate isn’t about gambling on gargantuan property deals, nor is it about flipping homes. The slow, steady trickle of monthly rental income is the foundation of investing in real estate. Any appreciation in the value of the home is simply the cherry on top.
The rental market presents a somewhat forbidding wall of entry to newcomers right now. Sellers are asking top dollar for their properties because there are so many more buyers than there are houses to sell. You may even need to start off with a fixer-upper, which can be a little more challenging to investors new to being a landlord.
Before you put forth the time and effort into shopping for an investment property, take a moment to consider the responsibilities that come with owning one.
Are You a Good Fit for the Role?
Do you like dealing with people and providing good customer service? Owning an investment property sounds like a set-and-forget proposition: buy a property, rent it out, and collect the monthly rent checks. But the learning curve makes getting your first income property the equivalent of getting a new part-time job. You’ll spend your first few years sorting out taxes and rental agreements, finding quality renters, learning to maintain positive, landlord-tenant relationships, and keeping up your rental property. Because you’re dealing with other people’s lives and schedules, these matters are not something you can take care of at your convenience. Do you have the time to take on this kind of an obligation?
Do you have the fix-it gene? You’ll get the best returns from your rental property investment if you’re handy with a toolbox. Calling hired help every time you have to unclog a plugged toilet or repair a damaged fence will nibble away at your profits. And even if you plan to handle a lot of your own maintenance and repairs, you’ll still need a healthy chunk of cash savings ready to cover things like broken appliances and storm damage.
Consider working with a property management company. If the idea of managing your rental property all on your own (listing the property when it’s vacant, reviewing applications, and screening and conducting background checks on potential tenants) isn’t your cup of tea or just not feasible because you live out of the local area, state, or country, then you may want to consider working with a property management company.
Can you afford potential long-term vacancies? Mortgage payments do not go away just because a renter does. Be prepared to take a hit during months the property is not generating any income. Again, enlisting the expertise of a property management company may a wise consideration here to help alleviate the possibility and associated pitfalls of long-term or unexpected vacancies.
Is the timing right? If you have personal debt of your own, adding an investment mortgage into the mix probably doesn’t make a lot of sense. Now may not be the right time for anyone who’s already paying off major medical bills, student loans, or hefty credit card balances.
Do the Numbers Add up?
With conventional mortgage home loans, the minimum down payment required could vary anywhere from 3 to 20 percent (or even more), depending upon: whether or not you are a first-time homebuyer, your credit history, the type of dwelling you plan to purchase, and the reason your buying. If you are unable to make a 20 percent down payment, then you’ll be required to purchase private mortgage insurance (or PMI).
Since PMI isn’t an option on investment property mortgage financing, you’ll need to be able to make a full 20 percent down payment in order to secure your financing. Interest rates on investment property financing may also be higher than a traditional mortgage loan as well, so plan ahead.
Before you buy, do your homework on the property taxes. If the current owners have a homestead exemption, you could find yourself surprised by massive property tax increases once your name is on the mortgage. Other expenses you may not have considered include HOA and/or condo fees, insurance, and routine operating and maintenance costs like lawn care and pest control.
Choose the Right Financing
Investing in a rental property takes more time, energy, and money up front. A balloon mortgage is perfect for getting started with an investment property because it keeps your payments low while you’re getting started.
Lower payments early in a 10-year balloon mortgage let you keep more cash on hand to improve or maintain the property. And when it’s time to make the large payment on the remaining balance at the end, you may be able to refinance the balloon payment with a new, longer term loan—although you’ll have to qualify for the new loan at that time.
PenFed Can Help with All Your Mortgage Needs
If you’re ready to make the investment, then consider securing your financing with PenFed. A PenFed 10-Year Balloon Investment Property Mortgage* offers loan amounts up to $417,000 at 75 percent (70 percent in Michigan and Florida) loan-to-value (LTV)—the percentage of the property mortgaged versus the equity that you own.
*This is a 10-year fixed rate mortgage with a balloon payment at maturity, meaning the unpaid balance is due and payable in full at the time of maturity. Loan matures in 10 years; you may apply to refinance the balloon payment at maturity.
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