Buying a second home for rental income is usually a common goal for most real estate investors after they have had success with their first investment property. However, some investors may be undecided since they think it may be too extravagant. If you are one of those who wants to know how to go about buying a second home for rental income, the following are some tips that will help you have a smooth process.
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Decide Whether Buying a Second Home Is Financially Sensible
You need to ensure that buying a second home is a sound financial move by considering not only the purchase price but also the ongoing expenses. You need to calculate an estimate of your probable expenses, considering any additional costs such as hiring a property management company and insurance. You need to consider the fact that you will be away from the investment property most of the time. Moreover, acquiring insurance may be more challenging and expensive when buying a second home than for a primary residence. For instance, when buying a beach house for rental income, you need not only flood insurance but also regular home insurance. You’ll need to determine your expected rental income and if it will be sufficient to cover monthly expenses.
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Decide Where to Buy
Location is a major driving factor in real estate investing. Buying a second home in a poorly chosen location will sabotage your chances of achieving your goals. You need to consider factors such as the availability of quality amenities, the strength of the local economy, the value of house resales, and property tax rates. You also need to decide whether you want to purchase a second home near your present home or far from your present home.
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Decide on the Type of Property to Buy
The type of real estate property is also important when buying a second home. The type of home that will serve you best will be determined by factors such as costs and upkeep. For instance, the demands and costs of owning a single-family home will be quite dissimilar to those of owning a townhouse or condominium. Townhouses, condos, and co-ops normally need less maintenance because the area of the investment property that is outside your unit is maintained and governed by a community association. You will, however, pay for the cost of that maintenance in the form of special assessments and monthly fees.
Related: Top 4 Property Types and Investment Strategies
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Find a Real Estate Agent That Knows the Area
Buying a second home can be quite challenging. The best way to commence your search is to hire a real estate agent that is familiar with your preferred location. A real estate agent can be a good source of information about market prices, neighborhoods, and the advantages and disadvantages of specific properties.
Related: The Best Ways to Find a Real Estate Agent
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Examine the Tax Implications
Investors buying a second home for rental income need to be wary of both income tax and property taxes. Even though these taxes are inevitable, planning in advance while still searching for a house can save you a lot of money each year. For instance, sometimes buying a house just over the border of a town can considerably reduce your annual property tax bill. If you own vacation home rentals, the number of days you spend there by yourself can alter the amount of income tax you will owe.
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Find Long-Term Financing and Short-Term Cash
Buying an investment property is often done by combining a down payment of at least 20 percent of the buying price and a loan for the residual amount. Having a higher down payment means that the loan will be lower, and therefore the more house you can afford. To come up with the cash for down payment, you ought to be creative. Some of the possibilities include refinancing your car, using your primary home as equity or getting a loan against a life insurance policy. For the rest of the financing, most people buying a second home will need to acquire a home loan. You should shop around and review different mortgage options to find one that suits both your short-term and long-term goals.
Related: Remortgaging a House to Buy Another: How Does It Work?
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Take Nontraditional Methods of Financing into Consideration
Another good way to acquire financing for your second home is to borrow from family or friends. Getting a loan from siblings, parents or friends to finance your second home will save you a lot of money in interest that you would have to pay for your mortgage loan.
Another approach that would save you money when buying an investment property is partnering with another property buyer. Even though shared ownership is becoming popular, you should not lightly rush into it. You have to first do an assessment as to whether the co-ownership with that person will work. If you are confident that it will work, you can then draft an agreement that spells out how you will deal with issues such as splitting of ongoing costs and what to do when one partner wants out after a number of years.
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Be Prepared to Be a Landlord
Whether you want long-term rentals for the consistent cash flow or short-term rentals to make money quickly, buying a second home means that you will be taking on a landlord’s role. As a landlord, you will need to understand how to find reliable tenants or vacation renters, how to prepare short-term agreements or leases, and how to deal with maintenance and management of the property.
Related: Quick Tips for Landlords of Income Properties
The decision on whether buying a second home is a good idea is completely up to you and your particular situation. You ought to weigh your options and discuss the idea with a real estate professional who can guide you.
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