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Chapter 6 – Expanding Real Estate Portfolio
So, you want to be a landlord?
You may find your parents, family, and friends asking you this very question when you tell them you’re thinking of diving into the world of buying property that you don’t personally plan to live in.
Here are a few things to consider:
More down payment then you may be used to:
Residential mortgages and the lenders who provide them expect greater down payment when it comes to “non-owner occupied” purchases. The reason for this is simple – you’re not living there, so it’s more of a risk to the lender than if you were. History tells us that borrowers in times of difficulty will pay their own mortgage first above any other payments; whether that’s their car, unsecured debt, or investment properties. With a larger down payment the lender is more comfortable with your commitment to repay their debt because, quite simply, you have more skin in the game. Putting 20% down, or more, is to be expected. On your first go, we often see refinancing your principle residence as a common source for the funds needed to purchase. This interest is also tax deductible along with the mortgage interest on the rental and costs to carry. We recommend you speak to an accountant to get some tax advice before you begin.
Cashflow is King or Queen:
Owning investment properties shouldn’t cost you each month. It’s best to review all available options when financing a rental property, with an emphasis on cash flow. It’s quick and easy to do an analysis and it should be one of the first things you do before you even begin to look at homes and properties. Costs should include, but not be limited to, the following:
- Vacancy (usually 4-5% of the gross rents)
- Condo fees if applicable
- Utilities, if the landlord is responsible
- Fire Insurance
- Mortgage payment
Scrutinize your tenants:
Often poor experiences come not from the financing, but the human factor – tenants. Applications should be seriously reviewed and analyzed in the same manner your mortgage application would be. Credit, employment, and reference checks will give you a pretty good idea if you will have any issues with a potential tenant or not and should be the very least you do as a landlord.
Once you get started, it’s hard to stop:
You purchase your first investment property and it’s going well. You bought it for a fair price, and the market is up. The house is now worth 25% more and you have “available equity”. You’re feeling confident about this landlord thing and want another crack at it, but you’re short on available funds for the next one. This is where we often see a refinance of the existing rental to access enough funds for the next one. But don’t get too excited, most residential lenders stop lending out after 4-5 homes. After that, it’s more of a commercial enterprise.