Dreaming of a Second Home? It Could Be a Reality
A lot of you out who still haven’t got around to buying their first home will probably be looking at this post and thinking it’s not for you. But think again. While buying your first home is tricky these days and requires a huge amount of saving and dedication, the second may not be all that difficult in comparison. So, even if you are still renting, read on – you never know when the second home dream could become a reality. And with the following info at hand, you’ll understand everything you need to know – so let’s get stuck into the basics of buying a second home.
The basics
So, before we begin, let’s explain a little why buying a second home is such a good idea in principle. With interest rates still fairly low, borrowing is cheap. And, if you can find something like a 30-year mortgage, freeze the price of the house for the entire period and just pay off the interest while increasing your rental rate every year or two, you can easily see why this is such a wise move in financial terms. Of course, there is a lot more to the process – and many more risks – than that. But essentially, there is money to be made from buying a second home, and it could turn out incredibly profitable.
The property
The beauty of property investment is that you can pretty much do what you like when it comes to choosing a particular rental area. For example, you can choose to create an apartment or dwelling in your current home or your current condominium, and rent it out to a tenant. You might buy a house that would be suited for your retirement, and just rent it out for the next couple of decades so the mortgage is paid off by the time you move in – leaving you the entire profit from your current home to live off. You could buy a second home for your college-going kids, too, and charge them and their fellow student tenants rent – and keep the process going for many years to come. Or, of course, you could buy a house somewhere attractive and entice vacationers to stay for a week or so – and leave it free for your own vacation two weeks every year.
The tax
Another important point to remember is that there are tax advantages of buying a second home. Without going too much into tax-detail-hell, you can save a considerable chunk of money by renting out a home. All interest, taxes paid and other deductibles can be taken off your annual tax payment towards the income you earn from the property. And not only that, if you end up making a loss, you can then deduct that against the rest of your income. Other tax benefits exist, too, such as depreciation. This is when you are allowed to reduce more than 3.5% of the purchase price every year for things like wear and tear. Finally, if you decide to sell up, you won’t have to pay capital gains tax if you roll your proceeds into another rental property.
The math
OK, so it can take a long time for you to persuade a lender that you are financially trustworthy and capable of buying a house. But make no mistake about it, once you have your first set of keys, the chances of you getting a second pair increase significantly. It’s all down to the fact that you have capital now, so banks and creditors feel a little more relaxed about your financial affairs because they know they have a guarantee. You will need to get a conventional mortgage, however, and you can also expect to have one on slightly less friendly terms than your original home loan. And you will also need a significant income – or, at least, a debt-to-income ratio of below 40-41% with both mortgages taken into account. Although this sounds an incredibly tough ask, it is still achievable, and with a little belt-tightening and careful attention to your debts, there’s no reason why any household should have a debt-to-income ratio that exceeds that figure.
The credit
A quick word about credit agencies. You’ll need to have an exceptional report, with a score of at least 620 if you want to get the best – and, therefore, most affordable – deals. If your rating is low or needs work, make sure you do it before you apply for a new home loan. Pay down your credit card balances, for a start – it makes up around 30% of your entire score. Never close an old account, either – it can drop your score by up to 15%. And finally, if you know you will be trying for a loan in the near future, make sure you don’t apply for new accounts. The inquiries pointing at your credit file could see your score drop by as much as 10%.
The investment
Before getting carried away and starting to buy up homes left right and center, be honest with yourself. The reality is that anyone that buys a second home needs to treat it as an investment – it simply has to make you money. Let’s say you buy a house but fail to find a tenant for six months of every year – it’s all your hard-earned cash down the drain, and you will be paying for two mortgages, not one. It’s imperative that you have a thorough and robust business plan in place to ensure that your second home doesn’t end up costing you a small fortune.
The conclusion
OK, so there you have it – some clear guidelines on buying a second home that everyone should know. As you can see, while it certainly isn’t easy, buying a second home is often more of a simple affair than buying your first – assuming you have a bit of capital behind you. And whether you want to rent out your property to families, students, or as a vacation home, there is so much potential to pay off the mortgage in a 25-30-year period and reap the rewards in your retirement.