Are you considering buying a second home?
You’re not alone in pursuing this aspect of the American Dream – in the spring of 2017, 9.26 million people lived in a household that owns a second home. Now is a good time to buy because home prices are falling.
But buying a second home and renting out the first is an undertaking, and it requires a bit of know-how. We’re here to help you figure it out.
Buying a Second Home and Renting Out the First
Let’s start with the process of buying your second home. It’s not quite the same thing as buying your first property.
When you bought your first home, you had certain priorities in mind.
If you’re like most people, you were in the market for a family home, a place your family could grow into. You were considering school districts, family-friendly neighborhoods, the whole nine yards.
Purchasing a second property is slightly different. To make sense of how to buy a second home and rent the first, it helps to break the process down into steps.
Assess Your Goals and the Market
Every smart house hunter knows that considering your goals is vital to the process.
Most second homeowners are older. Typically, this means their kids are either in college or grown up.
As such, there’s a fair chance that if you plan to live in your second home full time, it may be the house you retire in. That house will necessarily look different than the house you raised your kids in.
You should also look at the state of the market to make strategic decisions about when (and where) to buy.
Get to Know the Area
On a related note, you should spend quality time getting to know the area where your potential second house is located.
When you were buying your first house, you were looking at things like school districts. If this is the home you want to retire to, you’ll have different priorities in mind.
You should also look at the property as an investment. Check out properties in areas where the home value is likely to increase over the years.
Getting a Second Mortgage
Once you’ve found the right property, it’s time to figure out the financing.
Like your first home, the mortgage you qualify for on your second home is dependent on your income. The lender will require proof of ongoing income that can cover the mortgage and new obligations.
Of course, a second mortgage is a greater financial strain, so it’s considered higher risk. As such, you should have a good credit score and a solid credit history to back it up. This is proof for the lender that you will repay your debt.
Renting Your First Home
Next, there’s the matter of renting your first home, which isn’t simply a matter of putting the house up for rent.
You’re a landlord now, which means that you have to think like one. Your house needs to be ready for renters and it has to be priced right in order to be competitive in your local rental market.
Your first home is becoming an investment property. You need to treat it like one.
Assess Your Home’s Rentability (and Make It the Ideal Property)
It all starts with assessing your home’s rentability.
For example, a one to three-bedroom home will be easier to rent than a larger home. That’s because it opens you up to a range of renters from singles to small families.
The best place to start is to research who the renters are in your city (Are they twenty-somethings? Young families?) – and look at what kind of property they rent the most. This will give you an idea of how broad your house appeal is (and how good your chances are of renting).
Once you know your house appeal, you can set about making your house the ideal rental property.
A good way to make this easier is to meet with a professional. He can create a comprehensive strategy to make your home as appealing as possible in your current market.
Learn How to Assess Rental Fees
The fine art of setting rental fees isn’t about pulling a number out of thin air. It’s about striking a balance between a competitive rental fee and a rate that’s high enough to be profitable.
This can be tricky to establish if you’re renting a house. Rental rates are more difficult to track than apartments or condominiums.
Start by doing your homework and figuring out what your costs are, such as property tax and insurance.
It’s difficult to be a landlord for the first time. If you’re not sure what you’re doing and want to make your life easier, you could have your property managed by a third-party property management company like OneTouch Property Management.
Review Your Existing Mortgage
Before you start searching for tenants, make sure to take a look at your current mortgage.
It’s not just a matter of checking how much you have to pay off. Some mortgages don’t allow you to use your first residence as a rental property unless you pay a penalty or refinance for a more expensive loan. You may even be required to wait a year.
So before you pass Go and start collecting rent, read the fine print on your mortgage.
Tips to Help You Make Sense of Real Estate
Buying a second home and renting out the first is a bit of a tricky process. It helps to have an expert in your corner.
We’re here to help you make sense of real estate. Check out our blogs for tips on all facets of real estate, such as this post on how to purchase a property without breaking the bank.