Is taking a mortgage for rental property a good idea? – that’s one of the most popular questions in real estate investing. This is so because the method of financing the purchase of an investment property is one of the main determinants of the profitability of this income property. To answer this major real estate question simply: Yes, it is. Taking a mortgage for rental property is actually a wonderful idea.
You, as a new or even more experienced real estate investor, might wonder why. It just doesn’t make sense to take a loan to make money in real estate because you will need to be paying back this loan for a number of years. Still, a mortgage for rental property will actually allow you to make money through real estate investments, and here are the reasons why it is highly advisable to take a mortgage for rental property:
1. To start out early
The first reason why you should absolutely apply for a mortgage for rental property is so that you can start your real estate investment career as soon as possible. Let’s face it. For most of us, it is virtually impossible to buy a home or to buy an investment property fully in cash before we get old. We will need to save up money from our salary for most of our working life – while paying a rent for our own home – in order to save enough to be able to buy a rental property all in cash. And who needs that anyway? No one – that’s why mortgages have been invented, to allow average people to own real estate assets. In real estate investing, it is recommended to start as soon as possible. Being a real estate investor is largely a learning-by-doing job, so the more time you give yourself to learn along the way, the better. Moreover, it is quite easy to grow in real estate as long as you establish a right investment strategy and follow it. Thus, by all means, go ahead and take a mortgage for rental property as soon as you can.
2. To buy more investment properties
Another reason why mortgage for rental property is such a great idea is that it allows you to grow as a real estate investor. Once you’ve more or less paid off the mortgage on your first investment property, you should start using your rental income from this rental property to apply for a mortgage to start buying another real estate asset. This ability to finance your mortgage on one property with the positive cash flow from another property is why mortgage for rental property allows you to expand your real estate investment portfolio fast.
Alternatively you could also try a different real estate investment strategy to grow. Once you pay for the mortgage of an investment property, you can sell this property and then use the money for down payments on two or even three bigger, more luxury rentals while taking a mortgage to pay for the rest. You just have to be creative as a real estate investor to make mortgage for rental property work in the best possible way for you.
3. To have some spare cash
While buying an income property will definitely be your largest expense in real estate investing, you will have plenty of other costs to cover. Some of them will be one-time startup costs (closing fees, home appraisal, real estate agent fees, fixes, etc.), while others will be recurrent expenses (property tax, maintenance, professional property management, etc.). What all this means to say is that you will need lots of cash to run and manage your investment property. So, even if you somehow have at your disposal all the necessary cash to buy an income property, it is better to leave some of this cash for later to be able to afford all other expenses. All in all, you should use mortgage for rental property even if you have enough cash.
4. To take advantage of tax deductions
Yet another reason why you should go for mortgage for rental property is tax deductions. Payments on the mortgage on an investment property are tax deductible, which means that you should totally take advantage of this possibility. Any tax deduction which you can score only increases your positive cash flow and your profitability as CoC return and cap rate.
5. To buy a home as well
As long as you’ve spent some time in the world of real estate investing, you must have already heard enough times that you should buy an investment property (and become a landlord) before you buy a home. That’s true because your rental property will make money for you, while your home will not. However, this doesn’t mean to say that you should never buy a home for yourself and your family. In addition to giving you a sense of stability, owning a home also allows you to save up from not paying a monthly rent. Well, the ability to take a mortgage for rental income and to take a mortgage for home lets you buy both an investment property and a home at the same time. The rental income from your investment property will cover the mortgage payments on this real estate investment. In addition, the positive cash flow will let you pay even some of the mortgage payments on your own home. That’s a win-win situation, right?
As an aspiring real estate investor, you should know that taking out a mortgage for rental property is a great way to make money through real estate investments. It allows you to start out early and to grow without going bankrupt. Thus, you should head out soon to your local financial institution to see whether you are eligible for a mortgage and what the requirements and conditions are. Meanwhile, keep visiting Mashvisor on regular basis for advice on financing the purchase of a rental property and many other aspects of the real estate investing process.