Buying a second home as an investment property can be tempting, but there’s a lot that you need to consider before getting started. How do you know if it’s the right decision for you, and is an investment property worth it?
There are multiple pros and cons to buying a second home to rent. Here, we’ll look into what those are to help you make a decision.
Pros
Multiple Options
By renting out your investment property, you’ll receive a gradual income that will eventually earn you a profit on your original property investment.
This could be for long-term tenants or short-term, holiday rentals. With the latter, you could even use the home yourself for the occasional getaway.
Choice of Location
Your investment property could be bought anywhere, giving you the freedom to keep it far away from your own home if you choose. You could also opt for a particular location that is more likely to attract tourism if you’re renting out for holidays, or with a nice local community if you’re seeking someone to rent full time.
While having your investment property far away from your own home can help you to separate yourself from the business, you might find it easier to manage if it’s somewhere nearby.
Have a look at our sister blog post, The 10 Minute Guide to… Buying a Second Home in Wales, to find out where the right area for your investment property might be.
Long-Term Returns
Property prices vary wildly over time, so if you’re going to invest, keep an eye on the market. Buy something when prices are low, make renovations and upgrades when the market is at its best for you to do so, and eventually you can sell at the right time for a maximum profit.
Cons
Stamp Duty
Stamp duty is a form of land tax paid by people who own property. Every property has its own stamp duty that needs to be paid when it’s purchased, including investment properties.
As it stands, investment properties in the UK have a 3% surcharge charge on top of stamp duty tax, which can often work out as a higher figure than you expect. This is an unavoidable fee, so make sure you consider it as part of what you’re willing to pay for your second home.
Land Transaction Tax
Land Transaction Tax (LTT), then, is an additional tax you have to pay if you own a property over a certain price in Wales. There are different percentage rates of LLT that you need to pay depending on the price of your property, starting at £225,000. This has been the case as of October 2022.
- £225,000 - £400,000 = 6% LLT
- £400,000 - £750,000 = 7.5% LLT
- £750,000 - £1,500,000 = 10% LLT
- Over £1,500,000 = 12% LLT
If you live in Wales and are looking to buy your second home there, too, then it’s likely your accumulative property price is over £225,000. In this case, you should expect to have to pay LLT as part of your investment.
Barriers to Borrowing
Lenders are tightening up on how they give out money, and who they give it to. Your entire property portfolio will be taken into consideration when you’re looking to borrow.
This means that your properties need to be generating enough income to cover your mortgage payments, so even if your credit score is fantastic, you could be turned away.
Should I Buy a Second Home?
Only you can decide overall whether buying a second home is the right decision for you. However, our residential conveyancing experts could help you weigh up the pros and cons.
Get in touch today, and find out whether buying a second home is the right decision for you.
