New money, especially in the pandemic, has hit a cash mine in the depressed economy. Somehow. By a stroke of luck, real estate, especially people buying a second property, beat the odds to become a fail-proof investment while other investment vehicles like ETFs, stocks n shares ran the bear.
You may have noticed more listings of houses of friends with real estate agents or privately on the Facebook marketplace, but it isn’t far from easy to get onto the trend and create an additional income stream for yourself.
Here are five strong tips to consider when buying your second home.
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Save
It is time to pull out your excess savings for the rainy day. Unfortunately, more money is in circulation today than this time last year.
In 2020, over $3 trillion was minted and pumped out in the USA economy, representing an additional 20% of the money in circulation. Your money is worth 20% less in real buying power.
The moral of the point is to do more with your savings, and a second property might just be it.
For related articles on savings, read:
Take a Second Job Temporarily
A considerable part of the amount you are pre-approved for depends on your (family) income, and an easy way to boost that is to take on a second job to increase your assessed income.
Only note that most banks require you to have passed the probation period (typically three months) in your employments to count that as an income source.
A 15-hour-a week minimum wage job in Canada/USA will add $12,000/$7500 to your annual income, and if you are already on the property ladder, you know the multiplier of that on your pre-approved amount.
You know, after purchasing the second property, a rental income can replace your second job. It is all about freeing up time for yourself.
Side Hustle
A side hustle will take a while to mature as the banks will not want to gamble. Ideally, they’d expect you have relied on it as part of your source of livelihood and accounted for it in your annual returns, and paid applicable taxes for two years.
Although this may be a long shot, it comes in handy to add to your down payment. For example, if you are pre-approved for $200k and your down payment is $10k, but you have a savings of $40k, you can essentially go for a ($240k) house above that approved rate because you’d make up the difference from your side hustle.
A second property can conveniently become a side hustle requiring little effort than the ‘street money.’
Refinance Your Primary Residence
Yes, there is a penalty for breaking your mortgage contract early, but the charges are not as scary as you think.
Depending on your mortgage contract, it will traditionally not exceed a 3-month mortgage payment and some administrative fee. Be sure to request a breakdown of the cost and be comfortable to proceed with this option.
Also, it would be best to consider that the new mortgage amount will increase for your primary residence, and the interest rate is an essential factor when closing this transaction.
Refinancing your house will require a hold of 20% of its value in equity and the balance released to you in cash. Mind you, this step means (for Canadian readers), you no longer pay CMHC Insurance as part of your mortgage.
Borrow to Buy
The interest rate for a Line of credit is typically 5%, but you may want to shop around for a promotional interest rate (and stop shopping for promotions on clothes and jewelry) to buy your second home.
Also, you may want to explore borrowing from friends and family to make up your down payment.
Have a question? Reach out to our team at [email protected].
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