That’s right! How would you like to have your tenants pay your monthly mortgage payments? This would mean; not a single penny from your pocket would be going towards paying off the mortgage. As you may know now, we are talking about a rental property. Here are some tips you should follow before approaching the official purchase of a rental property.

1. Look for a good/reputable real estate agent.
2. Look for a good/reputable mortgage broker.
3. Look for a good/reputable mortgage insurance broker.
4. Try to find a property that would not be vacant most of the time.
5. Try to find a property without major work that has to be done.
6. Make sure the property was not built too long ago (inspection will take care of these aspects).

Usually, when you purchase a four unit property, it will be classified as a residential property. If its is over, it will be put under as a commercial property. The issue with a commercial property is that it requires a higher ratio of an initial mortgage down payment compared to a residential property. This is where your mortgage broker/advisor would help, they will be able to provide information which will outline exactly what is what and the cost as well. You also would not have to worry about having a large sum of money saved up, to qualify for a large property. The reason is that; the rental income would help qualify for the loan. The lender will do some calculations to get an approximate value for the rental income and take that into consideration in the process of giving out the loan. You can read more about this in one of our articles here; “Would Rental Income Help Qualify For A Loan?”. This type of property is a great revenue puller, get in this market while you can! You would also need some insurance for your property other than the mortgage insurance. This insurance would cover anything caused to your building by tenants, IE: a fire.

Useful Links & Tools
Information On Private Mortgage Insurance (PMI)
How To Cancel Private Mortgage Insurance
Would Rental Income Help Qualify For A Loan
Save Time & Money From Your Mortgage
Mortgage Tools

In some cases people would be living in a home, but would be buying a rental property which they would rent out for the year. The answer is simple, YES! The lender will calculate the annual income gained from the rental property and use that in the qualification of the loan. This purchase will be classified as an investment. In another case, if the property were bought for a permanent occupancy, it would be classified as permanent occupancy. The rates that come along with investment loans will be higher than permanent occupancy loans. The interest would be sometimes more than one a half times the original. However, down payment would be at a higher level, if the property bought is classified under as a commercial property or a revenue property. This is usually the case when there are more than 6 units which are rented out.

You are flipping through your local newspaper, and in the classifieds section and ad just catches your eye. The ad reads, ” This diamond property can be yours “, with a picture of an astonishing structure. Reading into the details, it states you can purchase the home for only $300,000 with an initial down paymentof $60,000. Another option is to rent it for approximately $1400 per month. Taking out your calculator and tools, you figure out what would be a better option. Let’s do the math together here, if you make a down paument of $60,000, you would need a mortgage of $240,000. At an interest rate of 5%, over a 25 year loan period, your monthly payment would be $1403 (Calculated using MortgageTonights’s Mortgage Calculator). The ad details on the taxes (municipal and school), which equals $291 on a monthly basis. So, your total output for the home would be $1694. That would be $294 more than if you rented the home. This is when you ask yourself, what should I do at this point? Should I buy or rent?

The first option that would hit any mind would be to rent the home. Now, lets out the extra $294 aside, and look at the benefits of renting the home;

• You can move if you don’t like the location, within a short notice.
• Renting is a smaller hit on your monthly expense.
• The stress in money management is lower, your home and credit rating is not on the line.
• If you are someone who relocates often, it best to rent.
• Renting will hold up less money. If you have a business with your money in it, its best to rent.
• Your landlord is responsible for maintenance, not you.
• Property value can drop immensely. Rent doesn’t.

Now, lets put that $294 together, to sum up the $1694, and look at the benefits of buying a home;

• Most of the time, property value will increase, profiting you.
• You have control. You will not be forced to relocate due to rent hikes.
• Tax benefits are awesome. All capital gained is yours.

This is where we get in-depth on the study. Now, it all depends on how long you decide to live at the location, and if you plan on selling the house in the future on passing it on to someone. Let’s take a typical situation, where the buyer says he will move in twelve years, to go live with his relatives in another country. Firstly, the renting cost involved would be ($1400 x 12 months) = $16,800. This is the total sum of money in the first year. Next year, if there is a rent hike, he would be paying more. We used a rental cost model to predict that each year would show a 0.02% rate increase. This brought up the six digit figure $202,295, which represents the total cost of renting a home for twelve years. Secondly, the home mortgage loan payment cost for twelve years would be ($1694 x 12 months x 12 years) = $243,936. So, you now see a $41,641 difference. You pay 41K more, however, the price of the home would be higher than what you paid for, and it will even out or go higher than 41K. So, both cases would be fine to pursue. You will have to chose which is best for you. Would you be giving the home to someone, IE: children, relatives, spouse.. There are many factors that come into play when making major decision like these. It’s best to think about it with a few professionals and family by the side.

Download Our Rental Cost Model, It Will Show You How Much You Will Pay In Rent Over Certain # Of Years