Investing in rental properties is a popular option for people looking to generate significant wealth. But owning an investment property when you don’t already have your own place to live in might not seem an attractive idea. But did you know that you can start by buying a house to live in and turn it into rental property?
Indeed, you can buy a home live in it for a few years, move out, then start renting it. Or you can buy a duplex, live in one unit and rent the other unit. However, before you take the plunge into property investing and start this wealth creating process, there are some things you need to know and do:
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Borrowing to buy an investment property
Unless you’ve won the lottery or you’re right outright wealthy, you will need to borrow money from a mortgage lender to buy your investment property.
Taking a loan out to buy a home is perhaps one of the biggest commitments, both financially and emotionally, you’ll make in your life. After all, most mortgage loans terms are 15 to 30 years. So you’ll have to deal with monthly mortgage payments for at least 15 years of your life.
However, the decision to get a mortgage loan doesn’t have to be a scary one. If you’ve done your due diligence and homework, you’ll find that borrowing can go very smoothly.
Know how much house you can afford
Before a mortgage lender offers or pre-qualifies you for a loan, they will review your financial information, like your salary, length of employment, credit history, etc. If you have the right stuff, they all offer you the loan.
Oftentimes, however, mortgage lenders can offer you a bigger loan. And the mistakes people often make is to accept that loan without ever looking at their budget to determine whether or not they can afford it. This is a big mistake.
Just because you’re qualified for a bigger loan, doesn’t necessarily mean you have to take it. A bigger loan means more mortgage payments, more money owed, and more risks.
Shop around for the best mortgage rates.
Not all mortgage loans are created equal; some just offers better mortgage rates than others. Because the cost of owning an investment property is expensive, it’s important to shop around for the best mortgage rates.
One way to do that is to use a site like LendingTree to compare mortgage loans, rather than having to visit each mortgage lenders’ websites or calling around for mortgage rates.
Getting a good rate can help you save thousands of dollars in interest over the life of your mortgage.
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The down payment
The size of your down payment will play a crucial part when buying an investment property. In fact, the more money you can put down, the more likely a mortgage lender will give you a good mortgage rate.
Moreover, a bigger down payment gives mortgage lenders a little bit of security should the deal turn sour. It also lets them know that you’re financially disciplined to have saved up that amount of money.
Most mortgage lenders will ask a 20% down payment on their mortgage. But note that you can always put down as little as 3.5% down. However, any percentage below 20% will require you to pay private mortgage insure (PMI).
Use LendingTree’s mortgage rates comparison tools to help you determine which rates are right for you before you apply for a mortgage loan. It’s completely free.
Related: Apply for a Mortgage Loan Today
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