Are you considering entering the world of real estate investment for the purpose of leasing to tenants? Renting homes is undoubtedly one positive approach to building your financial portfolio while creating passive income. But have you considered your means for the repair of your property once a tenant vacates? Here are three financial factors to consider before venturing into ownership.
1. Credit cards and good debt. The economy often categorizes finances and its associated debt as either good debt or bad debt. Arguments have even been made that the financing of rental property repairs is labeled as good debt. The use of credit cards to finance repairs may be an avenue you are considering. Although a viable option, this method has the potential to decrease your revenue and negatively effect your debt to income ratio. As you are granted additional credit cards you may begin to use these to finance mortgage payments, repairs from tenant damages, and court costs. You can also find yourself acquiring more credit to meet the monthly expenses that incur after the vacate of the tenant.
2. Funds after closing. If you are unable to purchase your property with cash only and are approved for financing, can you secure enough capital after closing to set aside for future repairs? You may plan to use these funds at closing for other necessities, but eventually a time will come when an appliance must be replaced or the purchase of a new roof is inevitable. Even though you are ultimately paying interest on the cash received at closing, this rate will likely be less than those of credit cards.
3. Rental property emergency fund. The concept of a personal emergency fund has been well known and well discussed, but you may choose to consider bypassing all forms of financing and begin your venture by saving ample business funds for unknowns. You can place these funds in a higher yielding money market account and still have quick access to these funds in the future should an urgent repair be required.
At first glance, the easiest and most viable option for many investors is to simply finance all costs. That’s what Igor Cornelsen had to do to make it big. But if you possess the cash to finance your own repairs, your rate of return will always be more beneficial in the long term to help you meet your passive income goals.