Factors to Consider When Investing in a Second Home

In previous years, investors preferred pension funds over any other type of investment as the most proper way to secure their retirement plan. Today, an increasing number of investors choose property investing as a means of capital growth and financial stability. Real estate industry offers great opportunities for long-term investment, for the most part, as a result of growing demand for properties, tax benefits, and cut down on interest rates. The benefits are so appealing that many people choose to invest in a second property, although they already own a home. However, to take full advantage of property investing, there are several factors that need to be considered.

Ø      Checking affordability

The most important factor when considering investing in a second property is if one can afford it. Some people buy a second home with the aim to rent it and collect additional income. However, although this practice will bring extra money in the household, it will also bring additional taxes as rental income is taxable. Therefore, the first thing to do is to calculate the financial and tax implications on the household budget.

For those who buy a second property as a vacation home, they need to calculate if the cost of buying the property covers the traveling expenses (gas, bus, or air tickets), the maintenance costs, the food expenses and any tax implications involved.

For people who buy a second home purely for investment purposes, the major consideration is the capital appreciation over the years. Investing in a second property located on a prime location is important whether the property will be rent or leased in the future. A real estate professional should provide helpful advice as to whether the location of the property is expected to appreciate on a long-term horizon, thus appreciating the rental value of the property.

In any case, real estate experts suggest that a home is considered affordable if it costs less than five times the buyer’s annual income. Potential buyers should not compromise for low cost homes because typically these properties do not comply with the fundamental rules of property quality and safety.

Ø      Making additional income to reduce EMI

Many people choose to invest in a second property when the real estate market is in an uptrend. In doing so, they collect an additional rental income for the second property, which they can use towards their EMI repayments. EMI stands for equated monthly installment and it is the principal amount that a home owner has to pay plus any interests. Therefore, homeowners, who already own a property and pay a home loan for it, may meet a portion of their EMI repayments by investing in a second property. However, they have to be sure that they can cover EMI for both home loans.

Ø      Easiness on getting a home loan

In previous years, banks were not giving home loans with the easiness they do today. Today, potential home buyers are given the possibility of getting a home loan in no time with low interest rates, short processing time, and zero or marginal processing fees. The eligibility of the applicant is decided based on income level, credit history, education, age, and repayment track record. Today, the 30-year fixed mortgage rate (as of 10/13/09) is 4.99, while the 15-year fixed (as of 10/13/09) is 4.63. Also, the loan rates are around 12 percent reduced by 29.4 percent from 17 percent that they were a couple of months ago. However, what prospect homeowners should pay attention to is the upfront costs that will be higher because banks currently refinance up to 75 percent of the second property instead of 90 percent of the first property.

Ø      Tax benefits

According to income tax rules, first property is considered as the main residence, while the second property is considered for rental or leased purposes even if this is not the case. Besides, under Section 80 C, principal and interest payments made towards the second property are deductible from the taxable income. Besides, 30 percent deduction from rental income is allowed for maintenance expenses. However, because rental income is taxable, prospect homeowners should have clearly calculated the tax implications before investing in a second property.