If you live in a city with high real estate prices like I do, it can be very difficult to find and buy a good rental property. If you can’t charge enough rent to cover all of your expenses, the property soon becomes a drain on your bank account. One of the easiest ways I’ve found to acquire your first property is to move and rent out the house you’re in. Here are the benefits:
- Banks generally want to see a 25% down payment to purchase a rental property. Since you are now buying your principal residence, the down payment can be significantly less (generally 5%-10%).
- You know exactly what the mortgage payments will be on the rental and they will likely be very manageable if you’ve been in the house a while.
- You’ll know exactly what you need to charge in rent every month to cover expenses.
- No need for a house inspection as you already know everything about the place. You now just need to clean and get ready for tenants.
- You probably have a nice place so you’ll be able to charge higher rent and attract better tenants.
This plan worked well for us to get started in our rental property business but it might not appeal to everyone. Here are some disadvantages that might have come to mind (followed by my good reasons to just do it anyways):
- You have to move! Yes, this is the big one – to leave your house and move to another. This might be bothersome for many reasons…you love your house and are too nostalgic to leave…it would take you completely out of your comfort zone to do something so drastic…it’s a very big job and more than you’d like to take on etc. etc. (Yes, all true but in the end it just depends what you really want. If your goal is to substantially increase your net worth with a rental property and financially it looks like the better alternative to buying a property to rent out – just keep the idea in your mind for a while. It may start to take root:))
- Moving is expensive. (True but also a relatively minor expense in the grand scheme of things.)
- If you’re putting 5% down on your next place, you will need to take out mortgage insurance which is costly. (I list this as a disadvantage but it is the reality for most people and really the reason for this whole plan. You can usually add the insurance on to your mortgage and it still makes a huge difference when compared with making a 25% down payment.)
We stayed in our next house for 2 years and then followed this plan again to get our second rental property. If you’re just starting out in the rental property business, I hope this plan will work well for you too.