Considering cash flow when owning rental property
If you’re an investor and you’re looking to break into the rental property market, how much should you consider contributing as a down payment? Lenders have rules, cash flow management is essential, and knowing the supplementary costs of owning a property are essential to your success. Below are a few points to contemplate when purchasing a secondary property that is held in the medium to long run.
The first thing to consider is how much cash flow will there be on your property…so do the math. Before you purchase a property, list out all of your expenses. If you had a very small down payment, what would your mortgage payment be? Add in all of your other costs such as property taxes, utilities or maintenance. Regardless of whether a property is brand new or not, it’s a great idea to build in a contingency plan for the costs of upkeep – the older the property, the more you should budget. After you’ve added up all of your expenses, remember that there could a personal income tax bill because you are now earning income on that property. Is your cash flow positive or negative based on the size of your down payment?
Remember that when you contribute less than a 20% down payment, you will have a mortgage insurance fee added and that’s not ideal for investment property because the purchase price is what protects you. The cheaper the purchase price, the better it is to protect your long-term investment. If the markets were to fluctuate, you are still protected if you buy low but by putting less than 20% down you lose some of that that room. The larger a down payment you put in (let’s say 20 or 30%) will ensure that you’re more likely to be cash flow positive. There’s obviously going to be some appreciation in the value of that property over time but primarily, in order to figure out whether it’s a good investment, you want to make sure that you have a positive cash flow after taxes.
It’s important to remember the basics if you’re considering buying an investment property. If you’d like to chat about how to plan for your investment home purchase, please fill out the questionnaire below, and we’ll be happy to connect with you about your long-term goals.
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