Investing in luxury homes is a major step as it is a big financial decision and if you get it done right the first time, you can hugely benefit by getting a strong return in terms of passive income, tax breaks, and equity gains. However, a big return on investment is only possible when you comb available luxury homes for sale in the areas of your interest after planning your budget appropriately.
If you have started to venture into the real estate world recently, there is a high possibility to make mistakes because you have too much on your plate to consider. Whether you are planning to buy a luxury home for living purpose, for spending your vacation or to rent it out year round as a vacation property, you need to be headstrong on deciding what makes a good real estate investment.
So, here, we have shared some important points to help you decide whether it is a good idea to take the leap or not.
Differences in Down Payment:
First of all, you need to understand the fact that the down payment differs depending on whether you are buying an investment property or a standard family home. You may typically need to put down at least 15% to 20% instead of getting away with a low down payment in the range of 1% to 10%. Besides, you cannot take mortgage insurance on investment properties. Plus, there are additional strict approval requirements when it comes to securing the finance. All of this results in a more substantial down payment.
Parameters like your credit score, your income, and your debt-to-income (DTI) ratio also determines how much you can expect for your down payment. So, as with any real estate purchase, be practical and collect your financial details before going out on the hunt of luxury homes available for sale.
Understand the 1% Rule:
The best idea to calculate the expected return on luxury homes for sale is by following the 1% rule. According to this rule, you should earn no less than 1% of the price you will pay for a luxury home including purchase price as well as extra money you will spend on repairs or renovations. In fact, this is the rule which helps investors decide whether a property is worth investing in or not.
However, like any other rules, there are some provisions also. For instance, if you are buying a property in an area with an upcoming neighborhood which is not likely to gain strong returns instantly, you might decide to shrink the 1% rule and focus on long-term ahead. But, in such cases, you should consider at least to keep your monthly mortgage payment at 1% of your total investment or a bit lower so that you will not significantly pay more than you are earning.
Fixes and Variable Expenditures:
An investment property, especially a luxury home, is not a purchase that you get away in one time. Some fixed and variable expenses are inherent in any property that you own. Although it is not possible to anticipate these expenses with complete accuracy, you should still need to consider everything while making the budget. It will give you an idea of how much you will be spending after investing and also help in ensuring that you won’t end with negative results every year.
Some of the fixed expenses are property taxes, homeowner insurance, property management expenses (if applicable), general upkeep cost including landscaping and cleaning, and HOA fees (if applicable). While variable expenses are hard to anticipate, it is still wise to make some room in your budget for unexpected repair costs such as replacement of water heater after a storm.
Once you consider all these factors while planning your financial budget, it would be easy to pick one from several choices of luxury homes for sale. After all, a luxury home doesn’t have to be a burden on you. Planning strategically and systematically will ensure that you enjoy owning a luxury home no matter if you are living in it or offering it on rent to vacation tourists.