Property remains a good investment prospect, especially for those who want to make a decent return without necessarily taking on a significant amount of risk in the process.
Should You Buy a Property to Let if That Means Taking on a Mortgage?
Of course, not everyone has the cash to buy an investment property outright, and may instead be thinking about getting a mortgage to cover the full cost, then renting it out to generate income.
So is it a good idea to buy a rental property if you need a mortgage to do so, and what are the considerations to keep in mind?
The perks and pitfalls involved
The obvious advantage of buying a property using a loan with the intent of renting it to a tenant is that you can turn a smaller downpayment into a larger lump sum return, so long as you are in it for the long run.
The rent you receive each month should ideally be able to cover your mortgage repayment costs and also net you a profit on top of this, while over time the value of the property will increase, and at the end of the mortgage term, you will be the outright owner of a property which you can then sell.
Conversely, if you pay in cash, your total returns could be proportionally lower, even if you do have the advantage of being able to cash out more quickly if the need arises.
Likewise getting a mortgage on a rental property can be a hassle, whereas buying with cash is invariably a smoother process.
Get the best mortgage rate you can
To maximize the profitability of your rental property investment, you need to be aware of current mortgage rates, as comparing the options available from different lenders and getting a favorable deal is key to making this arrangement work for you.
Indeed with the cost of borrowing hitting historic lows, it could be better to take on a mortgage when you invest in property even if you could cover the total cost with your liquid assets.
This comes back to the idea that the return on your investment will be greater as a percentage of the initial sum if you mortgage a property rather than buy it outright.
Anticipating the risks
There is one major risk that comes with using a mortgage to take on a rental property that is not present if you have paid in cash instead; that is if the house or apartment in question is unoccupied, then no rent will be paid during this period.
Relying on the rental income to pay for the mortgage is all well and good, but should circumstances change and no tenants are available, you will still need to keep up the mortgage repayments.
This state of affairs could become a real issue if you do not have the means to cover the mortgage costs until new tenants can be found. Of course, it could also be an entirely acceptable risk if you do not believe that this is a very likely scenario to arise.
It all comes down to being attuned to the housing market in your area, as well as more broadly nationwide. If there is plenty of demand for rental properties at a given time, then you can confidently go ahead with making an investment via a mortgage.
If you are thinking of buying in an area where the market is more volatile or slower-moving, then you need to recognize the risks you face and prepare yourself to deal with the fallout if things do go awry further down the line.