What to know before Buying an Investment Home
So you’ve purchased your first home. Congratulations! After the dust has settled, you may start considering investing in a second property. When done correctly, it can be a great way to generate passive income and grow your retirement fund.
However, there are a lot of things to consider if you want to buy an investment property. Here are some of the most important things to think over before you make any final decisions.
What is the purpose of the property
The first thing you’ll want to have a clear understanding of is the purpose of your second property. Is it a short-term investment that you want to flip and sell for a profit, or a long-term investment you want to rent?
If it’s short-term, you may want to consider a more affordable home that can be renovated at a conservative cost to reduce the associated risks. Or if you have long-term goals, you’ll need to make sure the rental market is strong and that you have an in-depth knowledge of the area you’re purchasing in.
If you want to buy a holiday house, make sure you have enough capital to support the purchase and select a property that has the potential to be rented out to holiday-goers when going unused.
Can you afford it?
While buying a second property can be a great investment strategy, you need to be in a good financial position to successfully pull it off. The deposit required when purchasing your second home will be about the same as your first, with most lenders requiring at least a 10% deposit.
However, you may be able to leverage your equity in your home as a deposit. Equity is the value of your home minus the debt that you owe. Up to 80% of your equity can be used as a deposit on your second home, so you can avoid having to build up your savings again. Read here How to Use Equity to Purchase an Investment Property?
But remember, in doing this both properties are at risk if you default on the mortgage. Make sure you are in a stable position to do this to avoid any financial disasters down the track.
Can you get a loan?
Before starting your search, you will need to know that you are able to get a loan to avoid wasting any time.Check out a online calculator for home loan to get an idea of what your options are, and then discuss this further with your bank or home lending specialist.
Even if you find that you are eligible for a loan, make sure you seriously consider the financial commitment you are making before finalising your decision.
Consider the hidden costs
When deciding on their budget for an investment property, most people do calculations based on their expected mortgage repayments versus the expected rental income.
However, this can greatly understate the true cost of an investment property due to the various other expenses that come along with it. This includes but is not limited to maintenance, insurance, property management fees and council rates. Make sure your budget takes these costs into consideration and you’re ready to take on these responsibilities.
Type of property
Many people are under the impression that houses make a better investment property than apartments due to the potential increases in the value of land. While land does of course hold a considerable amount of value, other factors come into play too.
The location of the property is a huge factor that shouldn’t be overlooked. More land in a cheaper area isn’t necessarily a good thing, and you may find it hard to find tenants or new owners down the track. Buying an apartment enables you to buy a cheaper property in a more desirable location, with lower upkeep and maintenance costs. If budget is a concern, buying an apartment can be an excellent way to go.
If you plan on renting out your second property, make sure you have a thorough understanding of its rental potential beforehand. Do market research on the area and consider the average rental costs of nearby & similar homes.
Some of the key things to consider when assessing a properties rental potential are:
- The neighbourhood
- Property taxes
- Nearby schools
- Crime rates
- The job market
- Future developments
Once you consider all these factors thoroughly and honestly, you will be well on your way to owning your second property. Don’t be afraid to reach out to professionals for help and guidance along the way.