Ready to Buy Your Second Home and Rent Out Your First?

If your current home seems like it’s becoming too small, and you’re ready to get out, you don’t have to let it go in order to get yourself another one.

In everyone’s life there comes a time when a move is needed. Perhaps it is because of a job change, the coming of a new family member, a marriage or divorce, or you just simple want a new scene.

A good sized portion of millennial home owners (who represent half of all home buyers today) are ready to move on to their next home. If this is the boat you are in, there is a decision to make. Is it best to sell your first home or rent it out?

If you choose to rent it out, there will be the luxury of that extra income. But before you decide there are several factors to consider before pulling the trigger.

Financial perks and considerations

Along with the extra monthly income, owning a second home will begin your real estate investment portfolio. What’s cool about this is it allows one to leave your owner- occupied mortgage intact by converting your primary residence into a rental.

Buying a non-owner-occupied property (which is just buying a house with the intention to rent out) typically requires 20-25 percent down payment and has an interest rate of /375 to .75 percent high than you’d get for an owner-occupied house.

The end game here is that it will cost less to turn your home into a rental property now, and buy a second home as your primary residence, than it would to buy a second home as a rental property. The requirements for a second loan are much stricter when you already have one, and it’s much more difficult to obtain.

If you happen to already have a lease in place on your first home before closing on your second home, your lender is more likely to allow the second mortgage. It can also help if you have experience in property management; lenders love seeing that.

Tax advantages

The best thing you can do here is speak to an accountant as tax rules can be tricky regarding rental properties.

Usually, the biggest tax advantage to turning your home into a rental property happens in the form of depreciating the property. Maintenance expenses and the mortgage interest also claims some of the benefits.

The perfect rental property

The first step in making the transformation from home to rental, is determining if this home is even rentable. Rentable homes with one to three bedrooms are much easier to rent than larger homes.

Do a little research on who the renters are in your city/town, and figure out what they are renting. The closer you can align yourself to their needs, the better luck you will have.

How to figure out rental fees

Rental rates differ greatly across the board from what type of property you have. The tricky part while owning a home and renting one out is to find the right price point in which you can stay competitive and still make a profit.

The way to do this is to find similar homes to yours and find out what they are being rented for. With this info you can determine what rental rates are in real time, and you can price yours accordingly.

It’s also important to do your homework and consider all the costs that come with renting a property. Two of the biggest will be property taxes and insurance.

The most difficult part of renting is being a landlord for the first time. Costs can and will come at you from every angle. Make a plan to spend more than your mortgage payment.

Words of wisdom

If you have the opportunity to rent out your home, do it. Take a good look at the situation you are in and see if it’s a good idea. If you happen to be in a seller’s market, it’ll be tougher to get into your new home without cashing out a bit of the equity on your first home.  

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