With house prices sagging and stocks fluctuating frequently, many investors are looking to buy property as a smart option for diversifying their investment portfolio. Although purchasing another house is a major commitment, it can potentially yield sizeable benefits. To help you decide, here are five considerations that should be made before purchasing a second home.
Investing in a second home can be an extremely expensive and time-consuming venture, so you need to be sure that you are prepared financially.
"Owning a home, whether it is the first or second home, chews up a lot of cash," explains Greg MacBride, senior financial analyst at Bankrate.com. "Property taxes, property insurance, maintenance, utilities, and mortgage payments together are a serious financial commitment. If the property gets sparse usage or sits vacant for long periods, this can be a financial drag."
As a result, you must ensure that your finances are prepared for the added strain.
Plan and purpose
If you do decide to take the plunge, you'll need to decide on a financial plan and purpose for your new property, MacBride says. "Is this a vacation home, an eventual retirement home, or an investment property? How will the costs of ownership be covered, even when the home sits vacant?" If you do choose to rent the property, make sure to evaluate the current market climate.
Whether you're buying your first home, or your 10th, don't forget about the location. An ideal house in an unappealing area will be difficult to sell or rent, and won't make for a desirable vacation destination. A real estate broker can help you identify promising up-and-coming areas where you can make the most money from your investment. If the domestic market shows little promise, you might even consider investing in an overseas property, though you'll need to conduct thorough research before making any final decisions.
Taxes can have a huge impact on the cost of your new investment. Property taxes vary greatly between different states and localities, so these should play a major role in your decision making. In addition, if you plan on renting the property, you may also have to pay income tax.
In many cases, a little strategic planning can help lower your tax burden. For example, purchasing a property just over the county border with lower property tax rates, or spending a certain number of days in your rented vacation home could potentially save you thousands.
Apart from the added financial strain associated with owning a second property, you must also be prepared for the extra time and effort required to rent property. If you plan on renting the house, you'll need to find tenants to ensure that your new property keeps generating income. Depending on market conditions and location, this can often prove more difficult than it sounds. In addition, it will be your responsibility to maintain the house, draw up agreements and prepare leases.