I can’t tear my husband away from DIY Network and HGTV. Whether he’s engrossed in yet another episode of “Property Brothers” or tsk-tsking right along with contractor/miracle worker Mike Holmes, when he’s watching his home improvement shows, he belongs to another world. Out of all these shows, however, there’s one that causes him to absolutely transcend time and space, moving him into an alternate DIY paradise: HGTV’s “Income Property.”
My husband has spent so much time watching this show and its host, Scott McGillivray, that he’s become obsessed with the idea of owning an income property. After much discussion (and begging and pleading), I acquiesced to the idea and, together, we started doing some basic research.
The Loan Trifecta
We started by visiting our mortgage broker to compare home loans. We still owe a sizeable portion of our mortgage on our current residence, although we have a large chunk of equity as well. We were hoping to pull out that equity to use as a down payment for the investment property. However, as our broker pointed out, we didn’t have enough equity in our home to pay for the new property outright. That would land us with three different loans between the two properties:
- Our current mortgage
- The resulting home equity loan
- The second mortgage for the investment property
A quick look at a mortgage calculator showed us this move was completely unfeasible. Between all the different fees associated with the loans – not to mention the principle and escrow payments – would have maxed out our budget. My husband’s dreams would have to go on the back burner.
Making Money as a Landlord
Despite our quick departure from the investment property market, I was still interested in learning more about exactly what it would take – maybe five or ten years down the road – to make it a reality for us. After all, property is a viable means of creating and accumulating wealth. Years ago, my parents inherited a pair of adjacent apartments from my maternal grandfather. My parents charged $750 a month for each of the one-bedroom units for more than a decade before the mortgage meltdown hit. With so many homeowners losing their properties to foreclosure – and becoming renters once again – rental properties became more and more in demand. Today, my parents are now charging $1250 in rent on each of the two apartments, netting them an additional $2500 a month, or a whopping $30,000 a year.
The Best-Case Scenario
Unless you own your main residence outright, you’ll be looking at higher interest rates on any additional loans you may have to take out to purchase an investment property. The reason here is twofold. First, home equity loans – in which you can secure 125 percent of your home’s appraised value, depending on your lender – are secured loans. Second, the more money you borrow and owe, the more likely your credit score will take a hit, resulting in higher rates as well.
If you’re lucky enough to own your first property outright, then you have more flexibility when it comes time to compare home loans. You can either use the equity in that home to buy the investment property – keeping in mind you’ll likely pay a higher interest rate – or you can take out a traditional mortgage instead. If you opt for the second route, you’ll have to decide whether to go with a fixed-rate loan – like a 15- or 30-year mortgage – or an adjustable rate mortgage, like a 3/1, 5/1 or 10/1 ARM.
The Residential-Switch Scenario
Buying a fixer for an investment property is often the cheapest option; I know it’s the one my husband and I considered. However, this comes with its own challenges. If you buy a property that requires an extensive amount of repairs – or even just cosmetic changes to bring it up to snuff – you may find yourself waiting months to put it on the market without seeing any return.
If you can’t wait to make money on your property, you might want to consider renting your current residence – assuming it’s in good condition – and living in your rental while you fix it up. If you don’t want to commit to long-term tenants in your primary home, consider using it as an executive rental, which doesn’t come with as many strings attached; plus, you can leave your furniture in place, reducing any moving costs.
Once you’ve rehabbed your income property, you won’t have to worry about having a tenant with a three-, six-, or 12-month lease living in your home. You’ll simply wait for the short-term executive rental occupant to move on, then move back in as you put your investment property on the market.