There are several options to consider, such as investing in commodities, peer-to-peer lending or buying a franchise. But if you’re somewhat familiar with real estate — or if you’re willing to learn the ins and outs — purchasing a second home might be the right investment for you.
Here are three benefits of investing in a second home, as well as financing tips.
1. You Can Earn Rental Income
If you’re seeking a long-term investment strategy, buying real estate and renting out these properties can be profitable. This investment strategy can provide steady monthly income, increasing your cash flow and helping you achieve other goals. Income from rental properties can go toward paying off debt, increasing your emergency fund, or you can put this cash toward growing your retirement account.In addition, if you buy a second home as a vacation rental in a touristy area, this offers the perfect vacation spot for you and your family when you need to getaway or escape. Since you’ll pay taxes on rental income, plan accordingly and seek advice from a real estate tax professional.
2. You Can Turn an Immediate Profit
Maybe you don’t like the idea of being a landlord. If so, there’s another way to invest in real estate. You can purchase a second home on a short-term basis and then resell for a profit.Many novice and experienced investors have made quick profits buying distressed properties like foreclosures. They hold onto the property for a few months, fix up the property and then sell at fair market value.
The only downside to flipping real estate is that you need sufficient income to afford a remodeling project. However, some banks offer shortterm real estate loans specifically for real estate investors. Speak with a loan officer to learn and compare options.
3. You Can Take Advantage of Tax Deductions
As mentioned, you have to pay taxes on income earned from your rental property. But you can also take advantage of landlord tax deductions. You’ll undoubtedly spend a lot of money over the years maintaining and repairing the property. There’s also the expense of traveling back and forth to the property.These expenses can cut into your profit. Deducting expenses associated with owning an investment property reduces your tax liability and you can keep more of your profit.
Financing Options for a Second Home
Unfortunately, purchasing a second home for investment purposes limits your financing options. Some people prefer FHA home loans because they feature a low down payment of only 3.5 percent. However, these loans are only for owner-occupied residences. For an investment property, you can apply for a conventional home loan. Just know that some lenders require a minimum down payment between 10 percent and 20 percent for investment properties.
The lender will also review your credit history and income to ensure you can afford the additional mortgage payment. As a general rule of thumb, this mortgage payment along with all your other monthly debt payments must not exceed 36 percent of your gross monthly income.Another option for financing a second home involves taking out a home equity loan on your primary residence. This might be an option if your primary residence is paid off, or if you have substantial equity in the house. You can tap your equity and use this money to pay cash for a second home.
Just know that getting a home equity loan will either create a new mortgage on a paid off house, or increase the mortgage balance on an existing home loan. So make sure you can handle the extra expense.
Bottom Line
Buying a second home as an investment can put quick cash in your bank account or provide steady cash flow. But getting started can be expensive, and as a landlord, you’ll be responsible for two properties. However, if you’re up for the challenge, a second home is an excellent investment that can increase your net worth.source: totalmortgage.com
