If you are looking for a way to grow your wealth, you might be considering some popular investment opportunities, like buying a second home. However, unlike many other options, such as stocks or Israel bonds, purchasing residential property is a particularly expensive investment. On the other hand, it also offers a unique set of benefits, including an immediate source of income. Because of the complexity of investing in a second home, you want to carefully weigh this decision before making a commitment.
To begin, consider these important factors:
#1: Can you afford it?
While it is critical to have available cash on hand for the property itself, you also need to consider the big picture regarding other costs. Buying a second home doesn’t just require an up-front investment during the purchase process, there are many costs that you will need to cover over the course of ownership including making renovations if it’s a fixer-upper and maintaining the property if you plan to have tenants.
In addition to the listing price, you also want to consider the property taxes. You might not be aware of this if you haven’t invested in real estate before, but property taxes can vary significantly from town to town if you’re purchasing within your state. The difference might be even more drastic if you are looking at properties out of state.
If you do decide to purchase a second home, you need to budget properly to prevent your investment from becoming more of a burden than it’s worth.
#2: Do you qualify for a loan?
If you don’t have substantial funds of your own to fully cover the property, you need to consider whether you can qualify for a loan and whether it is worth the risk. If you require a loan to purchase a second home, it can put you at significant financial risk should your circumstances change. Taking out a loan means you’ll need to have the income stability to make loan or mortgage payments for years to come.
Before taking out a loan, you should thoroughly evaluate your finances and your potential options. Pay special attention to the loan terms, including the interest rate. You will likely also want to consult a loan officer who can provide guidance.
If you do not have the financials or good credit to qualify for a traditional loan, hard money loans are an alternative solution because they rely on equity.
#3: Is it a strong buyers market right now?
Timing also plays an important role in the decision to purchase a second home. A seller’s market describes the trend when demand is higher than real estate available on the market, driving up prices. A buyer’s market is the opposite, meaning when the demand is lower than supply, it typically drives listing prices down. Otherwise, properties would be sitting on the market for too long.
Based on these trends, it would be to your benefit to wait until it’s a buyer’s market to purchase your second home. Usually, you can evaluate the current home market using online real estate marketplaces. You’ll likely also want to hire a real estate agent if you decide to move forward with buying a second home.
#4: What will the property be used for?
Are you going to be living in the home full-time, using it as a vacation home, or will you be renting it out? If you’re going to be living in it, will the property get sufficient use? You want to ensure that you are not throwing money down the drain.
On the other hand, if you’re renting it out, consider when, how much, and to who you will rent to. Some investors find that leasing their property full-time to reliable tenants is their preference, while others use the home for multiple purposes and only rent it out as a vacation property for part of the year.
It’s not all about money either. A sound investment can also be in regards to the overall value you it provides to your family. If you’ve purchased a second home to be closer to your grandchildren during the summers or your family has a favorite place to vacation that holds sentimental value, it might be worth the cost.
When weighing the pros and cons of investing in a second home, only you can truly determine whether it makes sense to invest. It is highly recommended that you consult experts or other investors you know to make the most informed decision.