Planning To Buy A Second Home? Consider These Steps

What is more complicated than financing a home? The answer is: buying your second home.

It might sound tough but scaling real estate investments is very common, especially in an appreciating market. If the first investment has already appreciated and a part of its loan has already been paid off, you are secure with your EMIs and may have more to spare for another property. 

Here are some steps to consider before you scale up your real estate portfolio:

1. Value old property: Do a fair assessment of the property that you already have invested in. The right time to go for an investment is when the property rises in value, covering the loan as well as your prior investment. Do not calculate its value based on current land prices. Instead, go to an agent to get the right idea about the value of your home.

2. Leverage wisely: Most of the second and third investments in real estate are done by leveraging old properties. Many of them use it as collateral with the banks to get loan for a new property. The next property that you buy should be lower on risk factor than the first one, as you will now be twice as indebted and strained on the financial side. If possible, pre-pay a part of your first loan with the equity-in-hand for the second property's upfront payment. That would give your banker a lot of comfort. Do keep the leverage lower than is permitted, so that the bank can give you a non-recourse loan.

3. Safer investment: It would not hurt to be a little safer in case a downturn might hit you. Do not choose a very new or an upcoming location; go for areas where property prices are likely to remain stable. If possible, choose a property that is already earning rent so that it can contribute to servicing the loan taken for it.

4. Cash flow: Has your cash flow fairly improved since you made your first investment? Ensure this before you go in for another property. Your in-hand salary should be strong enough to support you for two EMIs. Do not drain your savings and other accounts to invest it all in real estate. Make sure you have enough saved in the form of insurance, fixed or recurring deposits and other forms of more liquid investments. Do not touch the contingency fund.

5. Syndicate: Raising money from friends and family and bringing them as partners is a good idea while scaling up. By now, you would have enough experience in real estate and can make more informed decisions. You should use your experience in the past, and sell the story to bring in more investors for the next bet.  

(Katya Naidu has been working as a business journalist for the last nine years, and has covered beats across banking, pharma, healthcare, telecom, technology, power, infrastructure, shipping and commodities)