Some people believe that real estate is the best way to build long-term wealth. It’s possible that this is true, but it doesn’t mean you should buy a bunch rental properties and wait for the rent to come in. If you’re curious, let’s take a look at some things you might not have considered.
First, you should know that a rental property will require a higher down payment than if it were your primary residence or a beach house. You can expect to pay at least 20% down for most programs, and slightly higher rates, when you buy an investment property.
Why are these loans slightly more expensive? Lenders have calculated the risk associated with renting and determined that if your financial path suddenly hits a few speedbump, the rental property will be the first to be sold compared to your home.
If you don’t own a house, it may be difficult to find financing for a rental. First-time homebuyers are not a good match for rental properties. You should buy a primary home first and then let the lenders know your track record for on-time payments over a period of two years before you consider investing.
It is also important to consider whether you can use your new rental income as a way to pay off or even cover the entire cost of your new mortgage, insurance and taxes. Although many real estate investors say this is a very important consideration, you shouldn’t expect the lender to use the new rental income in order to qualify you for a new home loan. The two-year rule applies again. Lenders will want to know that you can manage not only the new mortgage, but also the tenants and maintenance concerns. You’ll have to show that you can do this.
Once you’ve established a track record, lenders will use your rental income to offset any new payments. This is where the wealth begins to build. You can buy and finance your second, third, or fourth rental using the new rental income.
Finally, over time, real estate values do in fact appreciate. There will be bumps along the way, but over the long term real estate values add to your wealth profile. Real estate can help people build wealth over time. You just need to be aware of what to expect.