Buying an investment property
If I had equity of 500,000 in my home (with a small mortgage left to pay) and wanted to buy a $450,000 investment property to rent out – please explain how that works when it comes to the repayments.
What would the “deposit” be calculated at?
I’m trying to figure out if the repayments (via rent) would be viable?
In: Mathematics
Investment properties typically only make sense if you can buy them below market value due to condition, fix them up a bit and either flip or rent out at a higher price than the mortgage.
In the US, a common strategy is to purchase homes that will be rented by tenants on government welfare, as the rent is backed by the govt and guaranteed at a certain rate. So someone will go in and buy very cheap properties, put a little bit of money into it, and then rent it out for 2-3x the mortgage value.
Another common strategy is to take an equity line of credit on your existing property – which is important because this can be used at any time for any purpose. Use that money to either entirely pay for or used as substantial down payment on a mortgage for a rental property. Once the property is acquired, rehabbed and ready for rent, you can refinance the new property, often times for a greater cash value than it was previously worth. Use the cash out portion to pay off the line of credit, and use whatever is left over as the down payment on the next property. Rinse and repeat to start your own little real estate empire.
Lastly, again in the US, when going for a mortgage on a property that has existing tenants, you can use the amount paid in rent every month to count as income when getting approval for a loan. This helps in scenarios where someone may not have a lot of cash on hand and aren’t already rich.
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