What is a mortgaged rental property and why do people need it
Normally the army folks sometimes need to shift from one place to another. It happens due to their work, their duties. So, after buying a home with mortgage, if the army official have to move in another place, he might need to rent his existing house. That property will be known as mortgaged rental property. Being the landlord, it is a good investment for the homeowner. The mortgage payment will be paid by the tenants and the home equity will increase through time. But is it really wise to buy such property? Before any kind of big investment, we must do required calculations. It is to determine whether the investment would be affordable for us or not.
So, let's try to understand the common myths of mortgaged rental properties and reveal the untold truths. By knowing the true nature of a rental property may be we can avoid the pitfalls associated with it.
Myth #1: Tenants will be responsible for mortgage payments
Rental market is a competitive market where you must fix your rent properly. You can not charge an absurd amount from your tenants. The rate should be according to the market value or given facilities. But first and foremost, it should be precise. When your tenant will pay the rent, divide the amount in two parts. 1) the mortgage payment part, 2) facility charges (your income). But it is seen in many cases that after paying several household costs, the landlord is not getting any profit. The costs may include insurance, taxes, utility costs and also maintenance costs. Practically, these costs will cover more or less 30 to 40 percent of your mortgage payments. So, The landlord is bearing only loss instead of profit. If the homeowner wants to get his share of profit, he must charge at least 130 or 140 percent of the mortgage installment from the tenants. But is not possible due to market competition.
Myth #2: Tenants are easy to find
Definitely, you may find tenants easily. But you can't tell that all of your future tenants will like your home and finalize the deal. They may not like it due to various reasons. It may also happen that this ongoing process may take several days, weeks or even months. During that time your income from rent will be nil as there are no tenants yet. If your house sits empty for few months, you'll have to bear a big loss. It is because there is no income, no profit but you still need to pay your monthly installments. So, you must keep this in mind that income from rental property can become zero at any time.
MYTH #3: Investing in the market is more profitable than a paid off property
Its up to you, whether you'll take the option or not. Social, economic and political situation have an impact on the resource you will choose. Many investors think that investing in the market will earn a huge interest. Practically, it is absurd, you cannot expect that much return over investment (ROI) in today’s economic climate. On the other hand, if you go for a mortgage, it will cost you, on an average 4% to 8% per year as an extra burden. If you can see the big picture clearly, you will notice a different view. A 30 year mortgaged house can cost you double, compared to it's actual price at the end. Means, you might have paid thousands extra towards your home rather than earn thousands from the market. Now you decide, which is better option for you.
Myth #4: Reduction of depreciation can be possible for tax benefits
There is an option that you can deduct the depreciation from tax. It will be deducted every year and applied only in hardcore physical assets like land, house, and machines. While selling your home, you must pay a part of that amount to the IRS. It is because the amount will be considered as income.