A great way to invest in real estate is in either a second home or an investment property. This type of real estate is a sound and profitable way to build wealth and generate a passive income. Fixed mortgage rates keep mortgage payments the same each month, so investors can predict their cost and profit. There is a risk with investment properties, so consider these four tips to find out if you are ready to purchase an investment or a second home.

Be sure to do your research and get advice

Like any decision, you will want to do your research before making the decision to purchase. There are many factors you will need to consider such as the condition of the property, location, and the area’s demand for rentals. Before you take a step, do your due diligence when it comes to your finances. You will want to make sure your income can support two mortgages even if you plan on renting your second investment. Also keep in mind that there will be additional expenses such as home repairs, maintenance, and furnishings.

Budget for the expected and the unexpected

Second properties have some expenses that are different than your primary home. If you purchase a second property either to sell for a profit or rent, many areas have permitting fees and additional taxes for investment properties. Remember to work with a tax preparer who will help you with capital gains or an increase in income.

Knowing when the time is right

Right now home prices are rising, so you may be able to use the equity on your primary home to pay for your second home. This can be done through a cash-out refinance or a home equity loan. A cash-out refinance is the most popular choice. There are no limitations on what you can use the money for. A home equity line of credit is secured by your primary home’s collateral. Right now is a great time to take advantage of these types of financing with such low rates.

Understand how you plan to use the second home

Either way, you need to speak with a mortgage lender whether you a using the second property for rental income or a second residence. Lenders follow the guidelines of Fannie Mae and Freddie Mac to ensure that you are able to afford both mortgages. There are different terms you must meet to be approved for a mortgage on a second home.

If the property will be a renovation or resell you will more than likely have to pay a higher downpayment and interest rates. Lenders take more of a risk when they lend money to someone who is purchasing a second home or investment property. Do not plan on trying to obtain a VA or FHA because these two types of loans cannot be used on second properties.

Not only do you want to secure a lender, but also secure a Realtor to help you with your purchase. A realtor can navigate the purchase from searching for your second home to closing the deal.

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