Can I Afford to Buy Rental Property?

If you haven't taken the plunge into investing in rental property yet, this is a question that you have probably asked yourself.

A lot of newbie investors or people interested in REI quickly write it off because they think it may take an exorbitant amount of money to buy a property.

The reality is that there are a lot of different paths to investing in rental property.  Each path may have a different threshold for how much money you actually need to start putting more cash in your pocket.

For instance, if you decide to house hack your way to your first property (buy a house and turn it into a rental when you leave) then you can get into a property for a much lower amount of money.

If you are planning to go the traditional financing route, then you are going to have to put in a higher amount-typically 20%.

But you still may be asking....

Can I actually afford this? 

 or  

What can I actually qualify for?

These are 2 great questions and I hope to answer both of them by focusing specifically on the second question.

I should note before I go into the details, that you should most definitely meet with a certified mortgage planner to help you get an accurate idea of what you can qualify for.  I'm not a CMP. (however my husband is)

But if you're looking to run a quick analysis of what you can qualify for to just get an idea...follow these steps. 

1. Take your total gross monthly income

2. Subtract your monthly debts (car payments, credit cards, current mortgage etc)

3. Take that number and multiply it by 45%

4. Your total monthly payment can’t exceed this number.

5. Check out mortgage charts online to see the total mortgage you can qualify for.  (http://philkennedy.com/image/ezchart.jpg)  

What's this actually look like in real numbers?  Check out the example.

$4,500  (Gross monthly income)

-$2,100  (Subtracted by your monthly debts)

$2,400  (Total)

$2,400 *.45 = 1,080  (multiply what is left by 45%- this is the typical DTI calculation) 

$1,080- A monthly payment, on an investment property, can not exceed this number.

**According to the chart linked to above- this payment with interest rates at 5% would allow you to qualify for a property up to $200,000.

Now that you are able to run a quick analysis of what you could actually afford.  Now you can decide whether you want to start looking to see what is on the market.  Again, I would meet with a CMP early in this process so that you're not wasting your time looking for properties that you can't afford. 

So the reality is, don't assume that you can't get started in rental properties because you don't have a ton of cash or you think you don't make enough.  Run an analysis to see if it is possible for you and then get out and start looking.  

The reality is reaching your financial goals is not going to happen by simply doing nothing!