Creating Sustainable Wealth Takes Ongoing Sources of Income
Purchasing investment real estate takes many different sources of income. Above all, ensure you don’t give up your day job to start buying an investment property.
Most folks can’t buy real estate, especially investment real estate, for instance, without using a lender. After all, if you are purchasing investment real estate, it will make you a borrower and a risk. However, the people lending you funds expect their money to be safe and secure. They are looking for low risk and a return on their investment. So 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 the joint because your lender wants a return on their investment. The lenders take the risk; therefore, the cost has much to do with your ability to service the debt.
Debt servicing is one of the leading reasons for 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 the “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 to measure 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 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.
Why 30 Years?
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. Throughout the mortgage, you will pay $186,510.40 in interest.
Here is the wild thing; your first payment will have $240.31 go to the principal. So if your first mortgage payment, around 22% goes to the principal pay down. In year ten, it jumps up to $395.79 or 35% to the top pay down, and in year 20, the principal paydown amount is $651.87 or just under 61%.
Remember, the amount going to the principal paydown grows as an amount and percentage with each payment.
By making your early payments as low as possible, you take much pressure off your earnings. Above all, you secure a fixed amount as your payment.
During the next five years, you should see a rise in your salary and possibly a promotion or two that pays you more money. Or you switch to a job that pays you considerably more money than your current job.
Given your current earnings situation, do you think 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 $105? Because Is this an actual situation? We recently increased our mortgage payment by $105 on one of our investment real estate properties.
We have a 40-year mortgage; the remaining mortgage balance is $77,600, and the remaining amortization period is 34 years and 36 weeks. Our mortgage payment is every two weeks. In addition, by adding $50 to our mortgage payment every two weeks (or $105 for the month), we are paying off your mortgage 13 years (s), six weeks (s) sooner.
Think about this 13 years, six weeks, few years of mortgage payments. Wow!
In other words, 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. Or earn extra money through additional shifts, make more money through advancement, or even add 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. For instance, how would this impact your net worth if you took half of your newfound income and enjoyed the other half?
Take Action Now
Get online and review your current mortgage.
If you followed this advice, what would your financial world look like in 5, 10, or 20 years? Then, use my example above and use it in your current situation.
I would love to hear your comments on adding $105 monthly to your mortgage paydown has impacted your financial foundation.