Creating Sustainable Wealth Takes Ongoing Sources of Income
Purchasing investment real estate takes many different sources of income to ensure you are in the position to buy investment property.
Most folks can’t buy real estate especially investment real estate without using a lender. If you are purchasing investment real estate, this will make you a borrower and a risk. The people who are lending you funds expect their money to be a safe and secure risk and are looking for a return on their investment. How do you lower being a risk?
Part of It is Attitude
Remember you are expecting a return on your investment, never get your nose out of joint because your lender is looking for a return on their investment. The risk lenders take, and the cost to you has much to do with your ability to service the debt. Debt Servicing is one of the leading reason to encourage you to keep your day job as you start to build your investment real estate portfolio.
What is debt service and why is it so important?
According to Wikipedia:
The debt service coverage ratio (DSCR), also known as “debt coverage ratio” (DCR), is the ratio of cash available for debt servicing to interest, principal, and lease payments. It is a popular benchmark used in the measurement of an entity’s (person or corporation) ability to produce enough cash to cover its debt (including lease) payments. The higher this ratio is, the easier it is to obtain a loan.
15,20,25, 30, 35-Year or Longer Mortgages
When you first begin your journey in purchasing your first investment real estate property, I recommend you go for at least a 30-year mortgage. Make sure your bank gives you options for repayment, and you should be able to handle these repayment options through your online banking. Let’s discuss a 30-year mortgage and pick a mortgage amount of $200,000 at a rate of 5%. Your monthly payments will be $1,073.64 over 360 months. Over the course of the mortgage, this will work out to you paying $186,511.57. Here is the wild thing; your first payment you will have $240.31 go to the principal. Of your first mortgage payment just over 22% goes to principal pay down, in year ten it jumps up to $395.79 or 35% to principal pay down and in year 20 the principle pay down amount is $651.87 or just under 61%. Remember with each payment the amount going to principal pay down grows as an amount and percentage.
By making your payments at the beginning as low as possible, you take a ton of pressure off of your earnings, and if you lock into a five year amortization period, you secure a fixed amount as your payment. During this five year period, you should see a rise in your salary and possibly a promotion or two that pays you more money. Or you switch employment to a job that pays you considerably more money than your current work position.
Do you think given your current earnings situation that you and your partner could not earn an additional $105 a month? I am guessing your answer is Yes.
Our $105 Month Extra Payment Story
Why did I pick a $105 because this is a real situation? We recently increased our mortgage payment by $105 on this investment property? We have a 40-year mortgage and the mortgage balance remaining is $77,600 and the remaining amortization period is 34 years, 36 weeks. Our mortgage payment is every two weeks and by adding $50 to our mortgage payment every two weeks we are paying off your mortgage 13 year(s), six week(s) sooner.
Having multiple sources of income or revenue is critical to putting a successful investment real estate portfolio together.
During the first five years of owning your first investment property, you can plan and decide if one or both of you in your relationship will see raises, earn extra money through additional shifts, earn more money through advancement or even look to adding part-time employment.
I showed you the power of $50 additional a week and what it can do to your investment real estate pay down. If you even took half of your new found income and enjoyed the other half how would this impact your net worth?
Take Action Now
Get online and review your current mortgage.
If you followed this one piece of advice; what would your financial world look like in 5, 10 or 20 years? Use my example above and use in your current situation.
I would love to hear your comments on adding a $105 a month to your mortgage pay down has impacted your financial foundation.