If you own investment property, you have a triple chance to make a profit:
You can collect monthly rent from tenants.
You can sell the house if it gains value.
You can refinance the house if it has appreciated, pulling out cash from a larger loan, tax-free.
Judging by options 2 and 3, your profit potential will be enhanced if you use a mortgage to buy a home that gains value.
However, becoming a landlord is not an easy way to wealth. It may take some time for you to receive positive cash flow. To put cash in your pocket, rental income must exceed all of your out-of-pocket expenses, including insurance, maintenance, and taxes.
Don’t forget to calculate mortgage interest. Say you buy a $200,000 house with a 70 percent ($140,000) loan. If you borrow $140,000 at 8 percent, that is $11,200 a year, or $933 a month, just for interest. You’d have to rent the house for more than that–enough to cover all your other expenses–in order to obtain positive cash flow.
Thus, before you borrow money to buy rental property, crunch the numbers and scout the area to see how much rent you’ll be able to charge.
