Every investor has to start with a single property, and one of the best ways to prepare yourself to purchase your first property is to do a practice mortgage.
What is a Practice Mortage?
A practice mortgage is exactly what it sounds like. In the year or so before you buy, crunch some numbers and put what you’ve determined the cost of a mortgage payment to be into a separate account every month and don’t touch it. (If it’s going to be your primary residence subtract the amount you’re currently paying in rent.) If you’ve determined that you’ll have an income suite in your home come up with a realistic amount you’ll be able to command in rent and factor that into your equation.
It doesn’t stop there. You also need a contingency fund to cover emergency repairs and maintenance. One of the big differences between renting and owning is that you are responsible for absolutely everything. There’s no landlord to save the day. Putting aside an extra 10% of your mortgage payment is a good place to start, but be aware that it will fluctuate.
Every month, be sure to put the money aside and see how your lifestyle is affected by the loss. If you find that it’s too difficult and you’re struggling to make ends meet, you’ve got a problem and you need to come up with a solution before proceeding. But if you find that you can do it without too much difficulty, you’re good to go. And the great news in both scenarios is that at the end of this experiment you’ll have all that money you’ve put away to put towards your down payment.
The key with a practice mortgage is to be realistic about ALL the numbers. Don’t be afraid to talk to a financial advisor, mortgage specialist and real estate agent throughout the process to make sure your numbers fit with the realities of the market and your own financial situation. It’s the best way to mitigate risk and prepare yourself for the financial responsibilities to come.
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