Owning property has always been part of the American dream. And now, more people are becoming landlords as a way to generate passive income.
Home ownership can be a great way to earn some rental income, but you have to be in a good financial place to start. If you’ve been considering buying property, use this checklist to determine if you’re ready to own property now.
Do you have 20% for the down payment?
20% is not necessary to buy a home- you can put as low at 3% down. BUT: 20% is a requirement if you don’t want to pay PMI. PMI is private mortgage insurance. It’s a policy that protects the mortgage lender from losing money if the property gets foreclosed on. Banks use it on riskier mortgages.
PMI is an added expense to those who put less than 20% down. So you’ll want to have either 20%, or be prepared to take on the fees associated with PMI.
Do you have a sizeable emergency fund?
Outside of home costs, it’s important to maintain a personal emergency fund. Your car could need a repair as you’re closing on a house, and you’ll need money for that.
Make sure that you have money set aside for personal, non-house costs that will carry you through the closing period. Emergency funds are always necessary, especially if you think you’re ready to own property.
Will you live here for at least two years?
Is this a strictly a rental property? If not, you’ll want to be there for at least two years. If you have a job that has you moving frequently, or you want to do some long-term traveling, it might not be the best time to buy property.
Does the neighborhood fit my lifestyle?
Does the neighborhood fall in line with the lifestyle you want to live? For example, does it have public transportation if you don’t drive? Does it have a good school system if you have kids?
Property is so much more than the physical building. You’ll have human neighbors and a neighborhood that comes with the package too. Do your research on the area and make sure it has what you want before you buy.
Am I going to make any major renovations?
If you’re buying a fixer-upper, you’ll need a stockpile of cash at your fingertips. Consider carefully as you look at properties. A long-term property that you want to spend weekends working on is very different from a property that you want to get renters into ASAP.
Be judicious about the time, money, and energy a property will require. Don’t take on more than you can afford.
A house is often the biggest purchase that someone will make. It’s a decision you make only after a lot of research and consideration. There’s no shame if you’re not totally ready to take the plunge. It’s better to be 100% ready for such a large purchase than to jump in before you’re ready.
Kara Perez is the original founder of From Frugal To Free. She is a money expert, speaker and founder of Bravely Go, a feminist financial education company. Her work has been featured on NPR, Business Insider, Forbes, and Elite Daily.