Should You Buy A Rental Property Even with Existing Debt?
Real estate is a great investment—people always need somewhere to live, and if you have a house or apartment you can always let people rent it. This way, you have an extra income in your pocket. But can you buy a rental property even with existing debt? The answer to this is yes, you definitely can. But should you? To help you, there are things you should know before you decide:
What kind of debts do you have?
Good Debt
This kinds of debt make cash flow for you and improves your financial state as its value appreciates over time. These debts require you to make a plan to pay it back without missing payments. Examples of good debts include mortgages, investments (bonds, stocks etc) and student loans.
Bad Debts
Bad debt tends to have high interest rates and the value does not appreciate. It also generates no or little future income, and due to the high interest rates, it’s very easy to fall behind in payments. Bad debts include car loans, credit cards and payday loans.
Investing in Property While In Debt
A big advantage in investing in a rental property is that it gives you additional cash flow. You can use this money to pay debts and eventually build your wealth. However, there’s a downside—your monthly payments increase. This could lead you to have less money for other things and makes your budget less flexible. Also, paying for so many things can very stressful.
If you’re already over head and ears in bad debt, it’s best if you spend your money on paying those off than adding more debt to your name. It’s best that you analyse your financial situation (and maybe consult a financial advisor) before making any decisions.
But once you’re sure that you can handle investing in a rental property, you can reduce your monthly payments by utilising your home’s equity. Equity is the difference between the value of your home and amount you owe. For example, if your home is worth $500,000 and your remaining mortgage is worth $250,000, then your equity is $250,000. Through different ways, you can use this amount to pay off debts or invest in a second property.
3 Ways to Manage Debt Effectively
Refinancing your current mortgage. You can refinance your existing mortgage at lower rates so that monthly repayments lessen and you can use the money to pay off other debts.
Cash-out refinancing. This kind of refinancing goes the other way around—take a new, larger mortgage that could pay off the older one. This will leave you with money at closing that you can use to pay off debts. However, this strategy requires you to have sufficient equity in your home and only allows you to cash-out 80%-90% of your equity.
Home equity loans. This type of loan needs you to have at least 20% equity in your home. You only have to pay the interest monthly. If you have enough equity, you can do this strategy to invest in a new property.
What you choose to do depends on your needs and priorities. However, making an informed decision is essential because this involves a large amount of money. If you need assistance or property advice, feel free to drop a message through any of my social media accounts and I’d be happy to help!
