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Maybe the Easiest Way to Dabble in Real Estate
If you are seeking to limit the risks associated with becoming a property investor, turning your current home into a rental property is among the best ways. Here are a few reasons:
- Cash Flow
The greater your equity in your home (all other circumstances being equal) the better the cash flow. You can rest easier knowing that mortgage payments on your investment are likely to be well below the rental income you can generate. Also, you should be in a much better position to tuck away a reasonable part of each month's rental income, so that even an unexpected big expense down the road can be managed without financial worry.
- Inside Knowledge
By living in your home as long as you have, you know all of its idiosyncrasies and how to respond to them. You know what may need replacement in the near future and can factor these expenses into your analysis. The usual learning curve of investment properties is absent, as you've already been through it.
- Added Control
Many rental properties on the market come with existing tenants. In such instances you always have to wonder, is the seller trying to unload his investment because his tenants have been a thorn in his side? When you move out of your existing home, you have the liberty of choosing your own tenants to place there.
- Better Financing
Loans for investment properties generally require a minimum 5% down payment and carry higher interest rates. If your current home becomes an investment property, the next home you purchase will be owner-occupied, making you eligible for HUD, FHA, and low or no down payment loans.
Building a Portfolio
One effective property investing strategy we see involves homeowners developing a real estate portfolio gradually, by using this very approach. They move into a new home every 1-2 years, fix it up as needed, then purchase and move into their next home without selling the previous ones. This strategy allows you to build up some equity in each property before it becomes part of your portfolio, qualify for owner-occupied status when financing every home, and (in most cases) apply 75% of the rental income from your properties toward your total income when your financing eligibility is determined.
A Word About Risk
As with any investment, there are considerable risks associated with rental properties. Real estate investments should not be undertaken before you seek the advice of your attorney and financial adviser.
Transforming your home into a rental unit does help reduce many inherent risks and as a property investor, you want this benefit on your side!
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