Conducting a real estate market analysis
It is important to perform a market analysis, also known as comparative market analysis, before buying a second home. Real estate market analysis is the first step towards making smart investment decisions.
Real estate market analysis studies the present market values of the properties comparable to the second home to determine its market value. This analysis is crucial for both new and professional investors because it helps in identifying the estimated value of a property before buying, selling, or renting it out.
Ensuring that the cash flows are strong
Buying a second home is cash-intensive, so it is a good idea to invest in one when one is holding excess cash and has a significant surplus in hand every month. A second property can be a good way to make these funds increase in returns. Whether buying your first home or second, it is very important to plan your finances carefully. Use Standard Chartered Financial Goal Planner to plan your finances better when purchasing your second home. Plan now!
The unique thing about real estate is that it needs a considerable amount of cash up front. As such, down payments of twenty percent and above are common. Moreover, you need an ongoing cash reserve for maintaining and covering ordinary expenses.
However, buying a second home is like investing in an illiquid asset. In a traditional investment, some stocks can be sold off to raise a lump sum as needed. But, that type of flexibility of selling off a portion of an asset is not applicable when buying a house. To add to that, past-due tenants, prolonged vacancies, and unexpected repairs can further complicate the problems.
Understanding the tax benefits of the investment
Buying a second home can ensure considerable tax breaks, provided you have a thorough understanding of the tax benefits of your investment. It is important to keep in sight both the long-term costs and short-term tax benefits.
According to the provisions mentioned in the Income Tax Act, 1961 (Act), you can claim deductions for the interest paid on your housing loan under the ‘income from house property’ factor.
In fact, when the house is self-occupied, you can claim interest deduction on housing loan up to INR 2 lakh per year. When the house is jointly owned, both the owners can claim interest deductions up to INR 2 lakh per year.
Over-concentrating in a single asset class
A second home means diversification of your investments, but it can also lead to concentrating your holdings in a volatile asset class. Investors who are just stepping out usually have a greater risk of real estate concentration as the property ends up representing a significant piece of their overall worth. Stay up-to-date with the latest developments in the real estate and other asset classes with Standard Chartered Market Insights. Explore now!
This can have its share of disadvantages. The real estate market can be immensely volatile, and though you can control the maintenance of the property, the factors driving the local and national markets are not in your control. These factors can change majorly.
Consider the impact of a top employer moving out or in a community, a major increase in property taxes, changes in interest rates, and changes in the public services a community offers on the property valuation.
Rushing through cash flow projections
The numbers should work just as well in buying a second home as it does in case of purchasing your first one. More importantly, when spending in a buy-and-keep property, the cash flow assumptions have to be solid enough to ensure that it’s a good investment.
A seasoned investor would do extensive research to get accurate expense and income figures and even build a model to get it to come together. A standard cash flow model includes provisions like taxes, expected vacancy rate, cost of capital, and the discount rate (the required return rate for the investment).
Failing to handle a mortgage
Mortgages are one of the best ways to buy real estate, and that includes a second home. Borrowing money brings down the amount you need to put at risk, but mortgages decrease your net earnings.
The rule to keep in mind is that a mortgage only works for the investors who are sure to have their real estate appreciate at a steady rate. The mortgage payment will bring down, though not completely eliminate, the monthly income. So, it’s important to understand how to handle the mortgage before applying for it. Here are some mortgage tips that will help you with the process. Check out now!
Takeaway
No matter how worried or unsure you are about buying your second home, remember that there are always ways to make the procedure easier on your existing funds. Familiarize yourself more with all aspects of a second real estate investment and the associated wealth creation before you purchase another property. Standard Chartered gives you easy solutions to help you finance your second home. Apply now!
