Taking the Plunge on Rentals

It cannot have escaped anyone’s notice that now is a good time to consider buying a second property as an investment. The time is right because the price is right.

Fear of risk is holding back alot of people, but let’s look at the risk factor. If you buy a home now, the price is right, the mortgage interest rate is right, you will be able to rent it and the person(s) who you will be renting your home to will be paying your mortgage for you. Not much risk there.

The risk is probably centered around the dropping values of the realty market. If the value of your rental property drops (which is more unlikely to happen now), it will not show until you sell it. If you keep a home for ten years and rent it out, the rent will have paid down your mortgage balance considerably.

The rent of the property must at least cover the mortgage and house taxes. Based on a $100,000 mortgage repaid at 5% with a 25 year amortization, the monthly mortgage repayments would be $550. Added to this would be approxumately $100 for house taxes, making a total of $650 which will be needed for the rental.

A mortgage of $100,000 per month needs a payment of $550 per month and the house taxes may account for a further $100 per month.

This means that for the rent to cover the mortgage and house taxes, the rent will need to be a minimum of $650 per month. This means that over 25% of the original cost of your second property has been paid for on your behalf.

This does not include any market increase, tax relief, rent increase or possible profit on the rent money. Local taxes and federal taxes can bo a source for tax credits and/or exemption.

There can be tax relief for private mortgage insurance, mortgage interest payments, points from loans, homestead exemption, property tax help and capital gains exemption.

Of course, you must have some spare cash, as there will also be outgoings because any house needs maintenance and you will have to keep the property in good repair.

If you take the trouble to interview your tenants, prudently check their references and always treat them with respect, you may be lucky. Another tip is to always get first and last month’s rent as well as a damage deposit. This must be returned with interest at the end of the rental agreement.

Each year there is provision in the law for the rent to be raised; always raise it below the maximum and tell your tenant that you are doing this. Keeping your rent slightly below the market peak is often good business.

If a tenant knows that their rent is slightly lower than it could be, they will want to stay in your rental home. If their plan is for long term, they will be more likely to look after it.



Quick House Sale