For many Kiwis, owning a house is a massive achievement. Not only does it mean breaking the shackles of paying rent to someone else. But owning a house means you have a highly valuable asset that allows you to start building equity of your own.
However, for many, the idea of purchasing a second property presents the opportunity to start building a nice little nest egg for you and your family. Which has the potential to create a fairly sizable return on investment.
If you are interested in purchasing a second home here are a few things you should consider early on in the process.
Financing the purchase
Obviously, purchasing a second home is a massive financial commitment. In most cases, it will require you to extend your current mortgage. However, if you think securing your first mortgage was a big commitment, imagine topping it up with a second.
So realistically, before you go any further, you will need to find out exactly, how much you can borrow and whether your lender will allow it. There are a number of factors that lenders will take into account when reviewing applications for you to extend your current mortgage.
Generally, these will include your current equity, your Loan to Value Ratio (LVR), your intentions for the property and its potential earning potential. From there, you will be able to understand what your borrowing potential is and how big of a deposit you require.
We highly recommend you arm yourself with all the information possible. So go speak with your lender to signal your intent and get their initial thoughts, and do not hesitate to contact one of our experienced advisers.
Location, location, location
This is a no-brainer really. As the old saying goes, ‘location, location, location’. Whether you are buying a bach or an investment property in the city, the location of your second home will drastically affect its future earning potential.
If you are purely looking to rent out your second house, then the location will have a huge impact on the potential tenants that will be interested. Make sure you consider the nature of the location, is it a family friendly suburb? Are there any major developments or projects being proposed? Or, is the house close to transport routes and good schools? Obviously, these are all highly desirable features that will make it easier to attract quality tenants.
If you are looking to buy a bach up north or in the Coromandel, make sure you will still want to spend summers there in the future. With buying a second home being a massive commitment, choosing the right location is critical. As you won’t be able to pick the house up and move if you get sick of the area.
What is its rental potential?
The main reason why so many Kiwis want to purchase a second home is due to the earning potential of an investment property. In most case, investment properties have the potential to form into a nice little nest egg for their owners.
If structured and managed correctly, you may be in a situation where your rental property is capable of paying for itself. This could take a massive weight off your shoulders. However, its earning potential will depend on your intentions for the house.
If you are purchasing an investment property, you should be fine as long as you are able to find reliable and consistent tenants. However, if you are buying a bach, its earning potential could be limited. It will be determined by two major things, firstly, how much you intend to use the property, and second, seasonal nature of its location.
How will it affect your lifestyle?
How will the decision to purchase a second property affect your lifestyle? This is something that should be a major consideration. Obviously, a property is a massive asset, however, it is a long-term asset. One that appreciates in value over time.
As mentioned above, the decision to purchase a second home will provide you with a nice little nest egg for you to call on in the future. However, how will the purchase affect your immediate lifestyle and short-term future?
If purchasing a second home has the potential to put you and your family in a hole for the foreseeable future, is it worth the purchase? Remember, buying a house, particularly a second one, is a massive financial commitment. So don’t take it lightly!
Purchasing a second home, whether it be a bach or investment, is a big step. If you find yourself in a position where it’s a viable option, make sure you seek as much information and advice as possible.
At The Mortgage Supply Co, we have both the experience and skills to help you take that next step on your investment journey. Get in touch today for some friendly, free advice and let us help you take the next step.
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