There are some who say the best way to accumulate long-term wealth is through real estate. That might very well be true, but it’s not exactly like going out and buying a bunch of rental properties and waiting for all the rent payments to come in. But if you’re even just a little bit curious, let’s look at some of the things you may not be thinking of.
The first thing to note is that buying your first rental will mean a larger down payment compared to your primary residence or beach house. With an investment property, you can expect to put down at least 20% for most every program out there, along with slightly higher rates.
Why are these loans a tad more expensive? Lenders calculate the risk involved with a rental and have come to the conclusion that, should your financial path suddenly have a few speed bumps in it, it’s the rental property that will be let go first compared to the home you’re living in.
Second, if you don’t currently own a home, you might have a tough time finding financing for a rental property. First-time homebuyers and rental properties don’t mix well. Buy a primary first, then let lenders see your track record of on-time payments for a couple of years, and then you can think about jumping in.
Another important consideration is whether or not you can use the new rental income to help offset or even pay entirely for your new mortgage, taxes, and insurance. While many real estate investors claim this is the most important consideration, don’t expect lenders to use that new rental income to help you qualify for the new home loan. Again, the two-year rule applies here. Lenders want to see that you can manage not just the new mortgage but also manage the tenants and maintenance issues. You’ll need a track record of this.
However, once you’ve established that track record, lenders can then use the rental income to offset the new payments. That’s where the wealth part begins to accumulate. You can essentially buy and finance a second, third, or fourth rental while using the new rental income to qualify.
Finally, over time, real estate values do, in fact, appreciate. Yes, there will be some bumps in the road, but in the long haul, real estate values do, in fact, add to your personal wealth profile. People can build wealth over time by buying real estate; you just need to know what to expect.
