Whether you're thinking about buying an investment property for steady cash flow, a vacation home for your family or a temporary home for your college-bound son or daughter, there are a few things you should consider before making the investment:
Local Market — Both the local resale and rental markets are important factors. Are home prices on the rise, increasing the possibility of a profitable sale in the future? Is the rental market tight, causing average rent prices to go up? You'll want your rental income to be able to cover mortgage costs, taxes and expenses.
Maintenance — When calculating costs, include routine maintenance and potential repairs. If purchasing a property to rent out, note any requirements and safety obligations for your area. If you're not the handy type or your desired property is far from your primary residence, consider hiring a property management company to handle ongoing maintenance concerns.
Insurance Costs — Find out if you need additional disaster coverage such as flood or earthquake insurance. In general expect to pay higher insurance costs, especially if you plan on renting out the property.
Financing — Plan on being subjected to more scrutiny than you were on your primary residence. Banks often require a higher down payment on second homes, and interest rates may be higher as well.
Tax Implications — Make sure you understand the tax implications of owning a second property. If you plan on renting it out, you'll need to report the rental payments as income. On the other hand, operating expenses, such as insurance, utilities and repairs, may be considered deductions.