When it’s time to buy a new home, most homeowners think they have to sell their current home, and often the sale proceeds go towards the purchase of the new home. But do you really have to sell your current home first? If you can keep your home and convert it into a rental property, you can grow your real estate investment portfolio. It is a common strategy used by homeowners to buy a second home and rent the first one, for a variety of reasons. For some homeowners, their home’s value is underwater and the homeowner cannot or is unwilling to take the loss of a sale. For other homeowners, they anticipate having to move back into it at some future date.
How to Know You’re Ready to Buy a Second Home & Rent the First One
In many cases, converting your home into a rental property can make a lot of sense financially if you are prepared and plan carefully for it. Whether you should buy a second home and rent the first one depends on a number of considerations, as explained below:
You Are Ready and Able to Take on Landlord Responsibilities
There are several advantages to renting out your home. The primary advantage is generating rental income. To do that, you need to be sure you rent to reliable and responsible tenants, which means checking your potential tenants’ financial history. A real estate agent can help you with finding a good tenant and the leasing process. When choosing a real estate agent, it’s important to find one that fits your needs. Renting your home may provide you with income tax breaks, though it will make your tax reporting more complicated. In short, a rental property that performs year after year offsets the expense of the property and increases your total asset value.
Be aware that becoming a landlord means you are ultimately responsible for maintaining the property. If your tenants do not live up to their lease obligations, you will have to step in. You can hire a property manager, which is a good idea if you are a long-distance landlord or you are not very handy. However, the property manager’s fees will cut into your rental income. If you decide to do the property management yourself, be prepared for unexpected expenses. You once lived in the home, so you should know what condition the appliances are in, the age of the roof, and similar issues.
You may want to set aside some funds for those eventual repairs. Also, talk to your homeowner’s insurer to make sure your insurance is adequate to cover any landlord liability. If not, you should consider getting additional coverage.
You Create a Passive Stream of Income
You can generate monthly income that offsets your monthly mortgage payments. In some areas, the monthly rent will cover all of the mortgage payments, any HOA payments, taxes, and insurance and generate a little extra each month.
Your Mortgage Permits Renting Out Your Home
Before you commit to renting out your home, read your mortgage agreement to make sure it permits you to do it. Your mortgage may prohibit it, or it may require you to rent it out only after you have lived in it for a minimum period of time. If your mortgage prohibits renting it out, you can try to refinance with another lender. You can also contact your lender and see if they would be willing to refinance you with a loan that permits you to rent it out.
You Have Ensured That You Have the Financial Standing for This Move
One of the most important considerations is making sure you have the funds necessary to make it all work. Figure out how much cash you have available for your new home’s down payment and a couple of month’s house payments on your new home and your old home. You need to be able to cover the house payments on your old home if it is vacant for a month or two until you have tenants.
Once you have an understanding of how much cash you have, you can evaluate possible financing options. For example, a home equity loan, or HELOC, can be used to finance your down payment on your next home, but you will need good credit scores to do it. The interest rates on HELOC loans tend to be higher than conventional purchase money loans. It might be a good idea for you to work with a financial advisor who can help you understand your financial needs and avoid taking on an unreasonable amount of debt.
Contact the Experienced Team at the Katie Zarpas Group for More Information
One of the best things you can do is to work with a savvy real estate agent from the Katie Zarpas Group. Their talented agent can save you significant time, frustration, and money. They have years of experience working with buyers and sellers who are looking for ways to make the most of their real estate investments.
Katie Zarpas can help you with how to buy a second home and rent the first one, negotiating a good price for you and take you through closing. The team can also help you locate good tenants for your first home and provide property management services if needed. Call today at 757-500-5596, or schedule an appointment online.