Prior to 2008 most Americans were convinced that real estate investing was a guaranteed road to riches and that “housing prices never went down.” Then came the housing crash and from 2007 to 2009 the average house price lost about 25% of it’s value. So those who had borrowed 90% or 95% of their house value were now “underwater” i.e. they owed more than the house was worth. Many of these people ended up in foreclosure putting additional stress on the housing market. But this doesn’t mean that investing in real estate isn’t a good idea. But like any investment you need to be careful that you buy at the right price and at the right time. And you need to be aware of the “opportunity cost”. That means what else could you do with that money? Could you get a better return elsewhere? These days, with the low interest rates banks are paying, more often than not, you can get a better return putting your money into property compared to putting it in the bank.
One type of real estate investment is a second home or “vacation home”. This type of investment can be a great investment as long as property values are increasing and demand for vacation rentals in the area you choose continues to be strong.
Advantages
One advantage of a vacation rental is a secure source of income each month during the vacation season, thus making your mortgage payments for you. If you buy wisely, the house will sell at a profit in addition to having renters pay your mortgage. This can result in a nice retirement equity being built up over the years.
Another side benefit is having a nice familiar place to be able to take the family for those great family vacations.
Protecting Your Investment
However, owning a property comes with risks and it isn’t all clear sailing. This is why it’s wise to gain a little knowledge on the ins and outs of investing in a second home. Money Vista boasts some great sources of information on how you might become an additional homeowner as well as information on mortgages and other financial agreements relating to properties.
In addition to this you also need to look at insurance. Property is arguably the biggest asset you’ll ever own and whether it’s your first home or your second, you need to take the necessary measures to protect it from loss.
Organizing Payment
Many people have difficulty paying for their first mortgage let alone having enough spare cash to pay for a second home. So unless you are lucky enough to inherit another property, you must think very carefully about how you are going to pay for each one. If you are paying for both your existing mortgage and your second mortgage you want to be sure that the second home will pay for itself or “cash flow”, meaning that income from the property exceeds expenses. For a typical rental you want to be sure that monthly income exceeds monthly expenses but for a vacation property you may have several vacant months a year during the off season, so in this case it is important that annual income exceeds all annual expenses. You also need to be sure that you have the cash available to carry you through the off months.
Crossing The Finish Line
Once your mortgage has been paid off in full, rentals will instantly become a source of extra income, as you can now pocket the mortgage payment rather than having to send it to the bank. This makes rental properties a great way to provide extra income for retirement.
See Also:
- 2 Types of Mortgage Insurance
- Is Now the Time to Take Advantage of the Current Buyer’s Market in Real Estate?
- Is Real Estate a Wise Investment for Retirees?
- Investing in Real Estate
Resources:
| Home Planners Dream Homes Design Books |
Image by DJ Slane on stock.xchang
