Are You Ready to Buy Another Residential Property?

To buy residential property beyond your primary residence, you should qualify yourself based on both fiscal and lifestyle considerations. Fiscally, real estate is one of the most expensive investments you can make. Defaulting on a real estate loan on a secondary property can harm your credit and even threaten the stability of an existing primary mortgage. Real estate differs from other investments not only in expense but also in responsibility. To protect your investment, you must be prepared to maintain the second home.

Fiscal Flexibility

If you cannot afford a second property, then no other qualification matters. Determine what you can afford by preparing an analysis of your current debts. Do your monthly debt obligations amount to less than 50 percent of your current monthly salary? If so, you may have enough income to support a second mortgage. The second mortgage should not push your debts beyond the halfway point. Buying a property requires more than just a mortgage, though. You will need to place a down payment. For secondary properties, buyers often place a larger down payment of at least 20 percent. This will eliminate the need for private mortgage insurance and allow you to convert debt to equity much faster.

Distinct Purpose

Owning a second property is a large responsibility. The property must be managed, either by you or a service you hire, the entire time you are absent from the property. Therefore, you should know the purpose of the property from the beginning. Is this property for personal use? If so, how often do you anticipate being able to reside there? Are you looking for a rental property? If so, how do you intend finding a manager to maintain the rental? Ensure you know exactly why you are thinking about investing in property instead of another option.

Open to Challenge

The money you spend on a real estate investment could be spent toward another purpose. Therefore, you should analyze the comparable options available to you. Real estate is not the easiest or cheapest investment you can make. In fact, investing in real estate is a true challenge with open-ended possibilities. If you are a low-risk investor, obtaining a second property may not be the best option for you. For example, a rental property could go vacant for months, shrinking your profits. Low-risk investors looking for a place to vacation may prefer a timeshare, where there is far less risk, as a comparable investment.

Knowledge of Taxation Implications

Owning more than one property carries heavy implications for tax season. You will essentially treat the property like a business investment, writing off a certain degree of expenses. In order to write these off, you must be prepared to keep track, diligently, of income earned and costs incurred on your second property. Further, when you sell the property, you will be exposed to capital gains tax. You should be familiar with real estate gains tax before entering into any property investment. There are options to manage these taxes, but many require proper planning when the property is purchased.