Investing With a Second Property

Buying a second property can prove to be useful and can expand the financial portfolio of the investor and ensure financial stability in their future. On the other hand, it is important to be knowledgeable of a few aspects before investing into a second property.

Second Property with The Intention to Rent

When investing into a second property for the sole purpose of renting it out to another person, there are established criteria that must be fulfilled by the borrower in order to secure a new mortgage. Before investing into second property for the sole purpose of renting, the following are few aspects that must be considered:

• 20% is the minimum required down payment of the purchase price, and the funds must come from the savings of the borrower. A gift from another person cannot be used.
• Only a portion of the rental income can used to qualify which will determine the amount that can borrowed by the borrower. There are few lenders who allow 50% of the rental income received by the borrower, while some lenders can allow nearly 80% of the income and subtract the expenses.
• There is a premium on interest rates when the mortgage is for a rental property versus a mortgage for a traditional home purchase. The premium can be anywhere from 0.10% to 0.20% on a regular 5-year fixed rate.

Also, the income received from the renting property can be used as a debt service for the mortgage application. However, some lenders have a minimum liquid net worth requirement outside of the property.

Vacation Property

Although vacation properties are not considered as an optimal investment, they are popular options for people who aim to build memories. When purchasing a unit within a hotel as a vacation spot, it is important to consider that if said property is being used to generate rental income, it will be treated like an investment property.

Secondary Property

The majority of individuals are trained in such a way that they prefer to stay out of debt and will not consider using the equity in their home to purchase an investment property. But the issue is that they do not understand the power of leverage. When using equity from the primary property to purchase a second property, the interest that is being used is tax deductible.

When investing into second property, it is essential to consider that an individual does not need to have a six-figure income. All they require is the down payment and enough income to service the mortgage. The minimum down payment is 5% for a secondary property, and if the property is being used as a source of rental income, then the down payment is 20%.

In the current market, homeowners are capitalising on the benefit of their appreciating property values. They are using this opportunity to invest into second properties and use the intended property for either rental or for vacation purposes.