DISQUS

PT · 1 year ago

imo, You'd have to have some serious positive cash flow from those renters to justify the kind of interest you'd be paying on a second mortgage debt.

If you've got enough equity to take the second mortgage, why not scrap that idea and just spend some time saving up for a nice downpayment?

Of course, the market is down and so that's likely why the question is being asked. To that I'd say...the market will be down again sometime in the future...skip this round and make sure you're ready with cash for the next. that's what i'm planning at least

FFB · 1 year ago

There's too many variables to give a good answer. How much debt will there be overall compared to the person's current income? Compared to the expected income? What kind of price is the rental property going for? Is it at a large discount? Does it need work? What are the housing/rental/landlord laws where this property is? How difficult is it to remove a tenant that isn't paying? Will the rental cover the second mortgage? Is there enough savings to cover months not rented?

For some people it may be perfectly ok to buy a rental property with a second mortgage but for others they could be way over their heads. You need a real plan going in and know that payments can be covered.

Mattress · 1 year ago

Is the rent going to cover the second mortage as well as provide additional income (your reason for the mortgage)?

What happens when your renters move out and you can't find new renters, you still have to pay the mortgage regardless of whether you're getting paid rent or not. Can you afford it? for how many months? How difficult is it to find renters where you're buying? What costs are associated with finding new renters?

Along similar lines what happens if your renters refuse to pay rent? In Milwaukee (maybe Wisconsin) if your renter has children you can't evict them during the winter. That's potentially 4-5 months of no rent and no possibility of getting new renters either.

Is the income (above the mortgage payment) and property appreciation worth the extra job of being a landlord; fixing every kind of crazy and stupid issue possible? Also it is wise to set up an LLC to own the property, that way if there is a lawsuit from your renters the LLC gets sued and you don't risk losing your own house as well.

These are issues worth thinking about and questions you should answer before you take this step.

That being said, I have a friend who owns two duplexes (lives in half of one) and does great with them. 75% of his mortgages are paid by his renters, he has equity building in both properties that he considers as his children's college fund.

Money Matters · 1 year ago

As Matt talks about, renters can be a huge hassle, especially depending upon where the rental property is. If it is in a low income area, you'll tend to have more problems getting and keeping good renters. And if you need to evict someone, a lot of the time you'll need to go through some time-consuming and costly procedures to get it done.

I've got a friend who has some rental properties, but when the economy turned, he had a hard time keeping his houses rented - resulting in some huge problems. Be very careful, and go in with your eyes open.. That's my advice.

Warren Whitlock · 1 year ago

It's often a fine line between borrowing for lifestyle and borrowing for investment.

It's best to keep your nest egg seperate from business and investments, but then you still have to invest your nest egg. <g>

Just ask yourself the question. Is this a good investment if we never spend a dime on ourselves?

vipness · 1 year ago

I agree with other commenters - please think about this for a long long time before diving in. Put a real plan together, including all the contingency plans - plan for screwups, vacancies, repairs, etc.

Josh · 1 year ago

Overall, I've found that mortgages as a form of debt are close to the only "good" debt (and for the record, I HATE it when people teach "good" debts!). On the other hand real estate is a great investment provided it's paid for. So no, I'd have to say taking a second mortgage is a bad idea in this case.

The Happy Rock · 1 year ago

Risk. That is the big variable in the equation that is often unseen. Any time you have debt, it is much more risky than not having debt. When you take out debt on top of debt to fund an investment that in and off itself is risky you are asking for trouble in my opinion. People don't plan for things like not being able to find decent renters, roof leak that costs $5000, loss of job, hassle of being a landlord, etc. All added risk. I would say pay off any other debts first, then make sure you are funding your retirement accounts to take advantage of tax breaks then focus on paying off the house. Simple and straightforward. Less fun and exciting? Maybe, but losing your neck isn't fun and exciting either.

sivanseg · 1 year ago

If you have to finance a purchase and you made your mind to do it - then a mortgage on the first or second property are pretty much the only recommended way. The interest one would get on a mortgage is cheaper than any other credit available. Like others mentioned here, it is more questionable whether or not it is worth investing in a rental property at all - considering the cost of maintenance and the hassle of dealing with tenants who sometimes are just pricks.

I think the question can only be answered after evaluating all of the variables including a projected positive cash flow and being able to cover the costs when and if your primary income will be gone. If you are about to retire - for example - it is generally not advised to take any new debt.

Another key question is the liquidity of the property, if you invest in areas like Detroit - you will probably find it hard to sell within the next couple of years, other places might show better recovery sooner.

If you live in Florida - you should wait until housing picks up again, the flood of condos there would render it pretty difficult to either find a tenant or sell later on.

I almost missed on the second part of the question - If you can pay off the first mortgage ASAP - then do so, the monthly expense you put into mortgage, when diverted into savings, can quickly accumulate into a fortune. Then you might be able to purchase rental properties with very little debt if any, and you can exploit the real returns from the properties to buy new ones every 2 years (buy a good real estate book first - they can give good advise).

Jeff · 1 year ago

Eric Douglass of www.erica.biz has some interesting information about this housing cycle we are in... check out her post at http://tinyurl.com/6x2quc. According to her research housing prices are on a 16 year cycle.. not sure I'd want to sit out for 16 years to catch the next go around.

pixie43 · 1 year ago

Well after selling our investment house property and being completely debt-free I would never want to be in that situation again.
In the first year we had to replace a cooktop, then we had to shell out !,000's in interest only payments, whilst rent was not even covering a fraction of the mortage and lastly I had to maintain the huge outside area constantly as we were getting it ready for sale.
I'm sticking with Stockmarket from now on!