How Much Money Does It Take to Invest in Rental Properties?￼
How much do you need to invest in rental properties? Most likely less than you think. Many people have allowed their dreams to be crushed by thinking that they do not have the amount it takes to venture into real estate investing. Some people do not know that you do not need to have 100% of the purchase price to invest in real estate.
This is where leverage comes in. Some investors can afford to pay the full price of a property using cash but most investors make use of leverage. In simple terms, leverage is applying a little effort for great results. In real estate, leverage refers to loans.
You, as the borrower, supply a small down payment and the lender pays the rest of the amount for you. Every month, you make a small payment to the lender until the loan is cleared. For instance, for a piece of property worth $200,000, you could only save $40,000 and borrow the rest of the amount from the bank.
Despite the fact that you have to make a payment to the bank every month, your income will exceed the loan. Leverage is not all perfect. Using more leverage may mean a greater risk. If you pay the full amount on your own, you will not have the monthly burden of paying off the loan. In that case, if your property is vacant for three months you might still be okay.
Also, if you only make a 5% down payment and the property depreciates by 20%, you will be “underwater” and the amount you owe will be bigger than the property’s worth. This can be very limiting. So, how should you use leverage? How much should you put down? You can increase your security in certain ways when using leverage.
Here are two of the main ways: First, the deal you land is way more important than the down payment. For example, say you buy a piece of property worth $100,000, get a $70,000 loan and only put down 30%. Another investor buys a similar piece of property for $70,000, gets a $70,000 loan and puts 0% down.
You will be at a greater risk in this case. Although you owe equal amounts of loans, you have invested more money. Secondly, having enough knowledge while investing in real estate can help you reduce the risk that comes with leverage.
If you understand the investment, how to manage it and the market in general, things are likely to go well for you. For a small multi-family house (two to four units), you can get a loan from the bank for as low as 3.5% using the FHA program.
You have to live in the house for at least a year, though. Most banks require a minimum down payment of 20% if you qualify for the loan. Real estate investing can go wrong. Cash reserves are important to help you take care of any problems that may arise.