Whether you’re in the beginning stages of your career, have been working for a while, or are even retired; the thought of investing has probably crossed your mind. There are various avenues in which you can explore for investing, and real estate has become an increasingly popular form of additional income. But is buying a second home for investment the best fit for you and your family?
Finding The Right Home
Do your homework ahead of time. Learn about different areas, how much you’d be able to charge for rent, zoning laws, rental trends, etc. When you are buying a second home for investment, look for a property that you would be happy living in. One that’s of course habitable for renters, and in a good area. One that you can make a profit with. Look at homes that are close to good schools. A property that has nearby shopping and restaurants. Nearby transportation availability depending on where you live. And even recreational activities close to the home. These are all things renters find attractive, and will pay for.
Risks Of Buying A Second Home For Investment
The old adage is usually true. With risk, there’s reward. But that doesn’t negate the fact that there are still risks. If you are buying a second home for investment, you are signing up to be a landlord. Unless you are buying the home to fix up for a quick flip, you will have tenants and added responsibilities. Initially, you’ll need to run the numbers to ensure you can make a profit. But you’ll also have to consider taxes, home applications, real estate appreciation, comps, cost to charge for rent vs.the cost of your mortgage, and maintenance costs.
It’s important to run a full check on the potential tenants. Not only do you want to make sure they’re safe, but you’ll also want to make sure they can financially afford to live in the home and pay you in full on time each month. Tenants that will hopefully treat your home like their own so they don’t cause any damage to the property. As a landlord, you also need to make sure you’re able and available to tend to any issues with the home that may arise. If anything goes wrong, such as an appliance suddenly breaking, it’s your responsibility to fix it or replace it in a timely manner.
Finding Someone Else To Manage Your Property
Not everyone wants to be a landlord. But if you are buying a second home for investment, you should consider learning all you can to be able to manage the property yourself. Unless you are buying several properties and have the financial means to hire a third-party to assist, it’s usually not the smartest financial decision.
Even though it’s not necessarily considered the most expensive route, a typical residential property management firm will cost anywhere from 8% – 12% of the rental value of the home each month. This does not include any additional expenses. On the other hand, some firms will only charge a flat fee of $100 per month. This may or may not be a good deal for you, especially depending on your margins. However, it all adds up. It’s an extra expense that will ultimately take away from your overall profit that you’d potentially be earning.
Rewards Of Buying A Second Home For Investment
The most obvious reward is the potential for your return on investment (ROI). Not only does buying a second home for investment allow you the opportunity to invest in the first place, but you can do this while making passive income. Naturally, investing is better than having your money sitting in a savings account making minimal interest.
There are also tax advantages. You can deduct insurance, interest, taxes, and other expenses against the income from the investment property. Additionally, you’re able to deduct depreciation from your taxes. If you decide to sell your rental property, you can roll over the proceeds from it to a different rental property without having to pay any capital gains taxes.
You should treat your investment property as a business. With research, the right property, understanding that there are risks, and patience for learning; buying a second home for investment can be well worth it. If it’s successful, you can continue to purchase additional properties and increase your income. If you are looking to purchase an additional investment property, the expert agents at Trelora can help, and you can save thousands of dollars. The bottom line is that the benefits of purchasing a second home for investment can be substantial.
Brady Miller, CFA is Chief Executive Officer at Trelora, Inc. Brady joined Trelora in August, 2018 as Chief Financial Officer. He moved into his current role later that year and is responsible for all daily operations and growth of the broader real estate business. Prior to joining Trelora, Brady was Chief Financial Officer of Leeds West Groups which is one of the largest, and fastest growing automotive retailers in America. Brady managed their real estate portfolio, financing, human resources, and accounting. He earned a Charted from the CFA Institute in 2016 and holds a bachelor’s degree from the University of Colorado, Boulder where he majored in Finance and Real Estate.