INVESTING IN A SECOND PROPERTY
If you’re thinking about buying a piece of real estate as an investment property, market conditions are definitely in your favour. While the resale housing market has seen a tremendous amount of activity from first-time buyers in the past year, it’s also a perfect time for existing homeowners to invest in secondary residential properties.
With record-low interest rates and significantly lower prices it’s hard to go wrong – unless, of course you lack the financial means to make the investment. After all, you have to be ready to meet all the obligations that come with owning more than your principal property.
Secondary home ownership is an attractive investment option because it gives you even more leverage than you have with your principal residence. Leverage is when a relatively small amount of your money controls a much larger asset – like a property.
The more leveraged you are, the greater the financial return on your down payment becomes if the value of your property increases. There are very few other investments which can be purchased with such a small percentage of your own money.
For instance, let’s say you acquire a second property for $200,000, with a $20,000 down payment, and during the first year that you own it, the property increases by a value of five per cent for a $10,000 gain. As a result, the return on your down payment of $20,000 is 50 per cent – $10,000 divided by $20,000.
You should be aware that the cost of obtaining a mortgage (for legal and appraisal fees) on a non-owner occupied property can be higher than the cost of obtaining a mortgage on an owner-occupied property, when more than one unit – such as a duplex or triplex is involved.
Interest rates charged on rental properties might also be bit higher because some lenders view these properties as being a higher risk.
As mentioned above, the main responsibility of having a second property is being able to carry it financially. And if you’re like most people, you’ll probably have to rent it to someone as a result.
This is also a great deal of responsibility because you will have to maintain the property in addition to your own principal residence, and you’ll be responsible for finding tenants who you trust and feel comfortable with.
Some parents with grown children ready to go off to university or college choose to purchase secondary properties for their offspring to live in while they attend school. This gives them an excellent investment and they are assured that the occupants will take good care of the home.
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