I am thinking of buying some rental property. I plan on using the
equity from our existing home to do this. I still have an existing
first mortgage of approximately $35,000 and the home is worth around
$175,000. Is it wise to take the equity and purchase another property
or should I take out a fixed rate mortgage on the new rental property?
The price of the rental property is $92,000, which would be paid
in full. -- Pat Porter
Don't expect any infomercials from Dr. Don any time soon on building
a real estate empire. Not that there's anything wrong with building
a real estate empire -- it's just the infomercial market is too
saturated to have room for another player.
Step back and ask yourself what the goal is after
you acquire this property. Are you looking to continue to acquire
rental property, or is this a one-time purchase? If you're looking
to buy multiple properties then you want to use the equity in your
current home just to make a down payment on the current acquisition
and take out a first mortgage on the rental property for the balance.
That way you've kept funds in reserve to make a down payment on
the next property.
If this is a one-shot deal, then you want to consider
the costs between holding a first mortgage on the rental property
and either a second mortgage or cash-out refinancing on your current
home. Compare closing costs, interest rates and total interest expense
with the three options. A Bankrate feature
has more on financing real estate investments.
Before you purchase this property, put together a
business plan to estimate the cash flows associated with the property,
including management, maintenance and upkeep. Owners often underestimate
the costs associated with rental property. Are you counting on appreciating
real estate prices to earn a return on the investment or will the
rental income generate a positive cash flow?
Finally, run all this by your accountant. He or she
can help you structure the transaction and management of the rental
property to maximize the tax benefits from this new venture.