There can be a number of benefits to purchasing a second property, such as the ability to generate revenue, the potential to increase the value of your estate, as well as make an investment in your future.

However, there are a few risks to consider, such as a larger deposit/down payment, the possibility of maintenance fees, and potentially higher interest rates. It’s important that you consider these factors and are financially equipped to cover the costs and can bear the risks involved. 

The motivations behind buying a second property will vary from buyer to buyer, and often depend on your financial situation. You might consider buying a second property with a view to renting it out. This is known as “buy-to-rent” or “buy-to-let” and can be a great way to open up another source of income. 

Be mindful that taking on a tenant is a significant responsibility, and for any new landlord, seeking legal advice is always wise, to ensure the property and your finances are protected. 

A second property may be the start to a career in property development or the beginnings of a rental portfolio. As with any business venture, always ensure you have a detailed plan, think about the ROI of each rental, and consider the market conditions in your chosen location.  

You may also want to purchase a second property to use as a vacation home, to save on hotel bills when you stay in your favorite getaway spot again and again. 

It’s important to ensure that you have someone checking in on the property off-season to check regular maintenance is being done on the property, to avoid little niggles (like a leaking pipe) becoming big problems. It’s also essential the property is prepared for any adverse weather conditions like storms or hurricanes. 

Property management companies are a great resource to help hold the fort while you’re away.

Preparing to purchase a second residence means getting your paperwork in order. 

If buying overseas, this might be more complex, and it’s important to consider any language barriers. Oftentimes an agency will help liaise between parties and translate all important documents, but this will come at a cost. 

Wherever you buy, lining up a down payment or deposit is one of the most important steps. 

For example, in the US this can be between 10% and 25% depending on the type of property.¹  However, in Spain the deposit required for non-residents can be between 30% and 40%.²  So, it’s key to do your cross-border research before committing to a location. 

Having this cash in the bank helps a quick and smooth purchase; but be conscious of any international bank transfer fees and taxes if you are purchasing a property aboard.

Tax breaks available for first-time buyers won’t necessarily apply to your second property, so it’s important to consider these costs. You can create a spreadsheet listing all costs associated with the purchase, including home inspection/appraisal and realtor/legal costs, and reconcile these sums against your savings to ensure you have enough funds. Additionally, it’s always a good idea to consult with a tax advisor before any real estate purchase.

Remember that you will most likely need to provide evidence of regular income – especially if you’re applying for a second mortgage – as well as consistent repayments towards existing credit agreements. Any financial commitments, whether that be another mortgage, buildings or contents insurance, or care for a loved one, are usually scrutinized by the lender. So, proving you’re a reliable borrower will be key to a successful application. 

As a second property owner you pose a greater risk to lenders than borrowers who own just one property. Being tied into an existing mortgage agreement, for instance, means you have more liabilities. What’s more, credit score requirements will be higher than for a primary residence. The best course of action is to seek financial advice from a mortgage expert, your tax advisor and other experts with regard to your financial objectives/goals.

An adjustable-rate mortgage could save you money during the introductory period when the rate of interest is reasonably low. However, it will become variable after this period. While it could theoretically fall, it could also rise significantly. Therefore, the rate you will be paying in the long term is uncertain, making it harder to budget for the future and a risk you are willing to bear.   

A fixed-rate mortgage is more common. The rate of interest remains the same for the life of the loan, which means you’ll know exactly how much interest you’ll be paying for the pre-set period. This financial certainty makes budgeting easier.

If you need to borrow a larger amount, you will need a “jumbo” or high mortgage loan. These bigger loans pose a higher credit risk for lenders because they are not necessarily guaranteed by government-backed home mortgage companies. The prerequisites for high net borrowers are more stringent than for those seeking a conventional mortgage; you will need to have a healthier credit score and a debt-to-income ratio of 43% or less.³

Remember that any revenue you generate from a property investment, even a short rental, will be taxable. However, rules and regulations vary per country so what you exactly have to pay will depend on your property location. Any potential caps on property tax means you may qualify for a deduction on your second property; so, check how much you’re already paying on your first property with a tax advisor.⁴ Talking to tax a professional will help answer your questions.

Taking legal responsibility for two homes means more commitments: two sets of monthly repayments, multiple utility providers, and twice the admin of one address. It’s important to consider your lifestyle and how you will manage this change and risks.  

The information contained herein is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Readers interested in the strategies or concepts should consult their tax, legal, or other advisors, as appropriate.