There are basically two ways to make an investment in property: to buy a house, condo, or apartment outright, or to invest in a real estate fund. Buying an existing property is a smart choice if you have the means. Of course, it’s also an excellent option for the average individual who is not tied down to any particular financial scheme. The primary problem with buying an existing property is that there is so much competition out there that it can be difficult to separate the good deals from the bad. You can eliminate this dilemma by doing the legwork first, acquiring a reliable broker, and doing all the research needed to find the best deal. Buying a real estate fund is like putting your money in a savings account where you plan to let it work for you – so do your research!
Either way you go, buying a property now means that you will own the place for a minimum of three years, although some lenders may require as little as one year to close the deal. During that time, your investment pays for itself and grows tax-deferred until you sell the property or move it into the investment part of your portfolio. At the end of the period, however, you must either renew the mortgage (paying capital gains taxes on your purchase) or sell the house for an additional price (called a foreclosure). An alternative choice would be to use the rental portion of the mortgage to stay in the property as a rental, which is not penalized with a capital gain, but does incur property taxes.
Investing in a real estate fund allows you to finance the purchase of a second home on one loan, with one lower monthly payment. For example, if you borrow 20 percent of the total cost of the house, and you plan to live in it for three years, your interest will be included in computing your mortgage interest. If you do not pay off the mortgage and rent the property, you will owe property taxes for the entire amount of the loan plus the rental value of the house. This could potentially save you in property taxes each year. In addition, it gives you a convenient way to access funds when you need them without having to apply for a loan.
Most second home buyers get pre-approved at their local mortgage provider or through the financing company. If they are unable to qualify for a pre-approval, they are most likely being turned down by the lender for another type of loan. Therefore, when they look for financing, the two choices they have are to either get pre-approved or find a way to get a mortgage interest rate that works for them. Two factors that factor into the decision process for getting a mortgage interest rate are credit score and down payment. Here are several tips on how you can get the best rates when refinancing for a second home.
Most homeowners insurance companies are tied to banks and mortgage companies. Therefore, if you want to secure your investment property with homeowners insurance, your home will be covered with the same insurance as the one you currently have. Your homeowner’s insurance premium is based on the value of your investment. The higher your investment value is, the higher your premiums will be. You can significantly lower your premiums by taking several simple steps.
As a homeowner, you probably have a current policy for your rental property. If you are buying a new home, check with your current homeowner’s insurance company about extending your homeowners insurance to cover investments. Many companies will increase your policy’s limits for rental income in one lump sum, instead of providing coverage for a monthly amount. If you have any unused cash from a recent rental payment, you can immediately apply it to your investment fund. This will help to ensure that you don’t run into any unexpectedly high expenses when buying your second home.
Another way to lower your investment risk is by hiring a property management company. These companies will handle all of your rental income concerns and account for them. For example, you can pay the company a set amount of money every month, so they can invest the money in different properties around your neighborhood. Property management companies are often less expensive than an independent real estate agent because they aren’t tied to one particular property.
Finally, when buying a house, if you plan to use the house as a vacation rental, check your lender’s vacation policy. Some lenders may require that you rent your house out for a certain number of days per year. If you can prove that you will be renting your property for more than 6 months each year, you can usually get an exemption from this requirement.