Are you considering renting out your first home and buying a second one to live in? Whether you’re downsizing, relocating, or need more space for your growing family, turning your first home into a rental can be a smart move. Buying a second home while renting out the first has been a popular option for many homeowners looking to build wealth.
But where do you even begin? In this guide, we’ll walk you through the process step-by-step. We provide the information you need to assess your financial situation and find the right property management support. Keep reading to find out more.
Contents of the Article
Preparing Financially
You should keep a few things in mind as you decide on buying a second home and renting out the first.
There are a few considerations to make before buying a second home and renting out the first. Before deciding if this is the right option for you, it’s important to understand the financial implications of getting involved. If you’re considering hiring help to manage your rental property, looking into Baltimore property management companies can be a good first step. In the meantime, focus on:
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Your Mortgage & Equity
If you’ve been paying off the mortgage for your first home for a while, you likely will have a higher equity. In turn, this can help you access funds or use your home as collateral.
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Rental Income
Speaking of mortgages, the rental income you make from renting out your first home can help you handle one. Now, let’s assume you owe $150,000 on your first home’s mortgage, and you pay $1,000 of it per month. If you rent your first home for $1,500 per month, you could cover your first mortgage payment and make a dent in the second one, too. In other words, you can kill two birds with one stone.
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Risks and Extra Costs
Buying a second home and renting the first one can be great for making extra money, but there’s no guarantee it will always be smooth sailing. From time to time, the first home might sit empty, and you won’t make any rental income. Or, urgent repairs could show up, like failing electric wiring or a leaky roof. In this case, you’d have to save some extra money for a rainy day. In addition, it can take unfathomable time and energy to address these problems unless you hire a property management company to handle them for you.
Tips on Renting Out Your First Home
Once you’ve decided to rent out your first home, there are several important steps you need to take to make sure the property is ready for tenants. These steps can help you attract good tenants, keep your property in top shape, and avoid any future issues.
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Make Necessary Repairs
As you move out to your second home, you should make necessary repairs for the first one. You need to make the house habitable and appealing to the potential tenant. For instance, fix leaky faucets or pipes, faulty electrical outlets, and broken appliances, and address any safety hazards.
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Deep Clean the Home
Although it might seem obvious, you should give the house a thorough deep cleaning before you list it for rent. If you need to, you can hire professional cleaners wash the carpets, windows and blinds, door frames, vents, and any area that could have built-up dirt or dust.
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Update Key Features
Now that your house is about to enter the market, consider giving your property some updates. Even if you can’t upgrade the entire house, just a few ones can take its appeal to the next level. What’s more, it can enable you to offer a higher rental rate. Here are some simple, yet effective, enhancements to consider:
- New paint: New paint makes the space feel brighter and newer. To really make sure this fix has your intended impact, choose color options that appeal to most people. For instance, you could pick neutral, light hues like beige and white.
- Upgrading fixtures: Updating fixtures can make a huge difference in marketing your rental house. You can swap old light fixtures, faucets, and cabinet handles with more modern options. Also, research what is currently trending when making these upgrades.
- Improving curb appeal: First impressions matter! So, you should make sure the house exterior looks well-kept by mowing the lawn, trimming bushes, or planting flowers.
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Set the Right Price
Now that your house is “rebranded,” consider checking the local rental market to find out what similar homes in your area are renting for. After all, pricing is a delicate balance, and it’s critical you get it right. The last thing you want to do is to overprice your rental. This will make it immeasurably harder to find tenants. At the same time, you don’t want to accidentally charge a low price for your location and limit your profit potential. To avoid either outcome, use online tools like Zillow or Realtor.com as comparative tools.
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Prepare a Rental Agreement
After getting your house in order, your next step is crafting a rental lease. This is a legal contract between you and your tenants. As such, it must leave no stone unturned. This document should clearly, thoroughly outline the terms of the rental, like rent amount and their due date, lease duration, tenants’ responsibilities, house rules, and more.
Essentially, if you hold any concerns that have even a remote possibility of happening, you need to cover them in your rental agreement. It would be a good idea to work with a lawyer to ensure your lease is legally sound.
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Consider Property Management Services
Managing rentals is time-consuming. It can entail responsibilities like addressing repairs in the middle of the night, handling rent collection, and other burdens. So, you may want to get support in handling your rental’s day-to-day management. In particular, this could prove especially helpful if you live far from the property or simply don’t have time to manage it alone.
Tips For Buying Your Second Home
Buying your second home may be more complicated than buying your first property. The process can entail more logistical, legal, and financial considerations. To help make this just a tad easier, we’ve provided a brief guide to help you navigate it all:
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Know the Difference Between Buying Your First and Second Home
Typically, banks view it as a risk when you juggle two mortgages at once. Because of that, they may require stricter qualifications than they did for your first mortgage. For instance, they may demand a larger down payment and higher credit score.
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Understand Your Financial Situation
Before you jump into buying a second home, you should consider how much money you make and how much debt you have. If you are renting out the first home, the money you get from tenants can help pay your first mortgage. However, remember that banks generally count only 75% of your rental income. This is because they assume you have periods when the property is empty or needs repairs. Also, again, you will likely need to make a bigger down payment.
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Figure Out What You Want in a Second Home
Ironing out your plans for your second home can help you make a more informed decision. Here are some factors to consider:
Location: You should pinpoint where you want it to be. The major questions should be, do you want a second property by the beach, a cabin in the mountains, or just a home in a busy city? After all, location affects the price, how much rental income it can make, and how much you can enjoy the property.
Usage: You should know exactly how you plan on using the property. For instance, if you are buying a second home to rent, you’ll need to check the local rental laws to see if you’re allowed to. In particular, this is critical if you want to use sites like Airbnb or VRBO.
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Check Your Credit Score
The higher your credit score, the better interest rates you can get on your second home loan. For example, if you have a high score, like 700+, you have better chances of get approved for a loan with a lower interest rate.
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Plan for Ongoing Costs
You might think that you just need the mortgage payment that is needed for a second home. However, you will need to factor in other costs like property tax for every year, homeowners’ insurance, maintenance costs, utilities, and more.
Risks and Benefits of Buying a Second Home and Renting the First
Now that we have established that you can buy a second home and rent the first out, we should consider the risks and benefits of doing so. It would be wise to weigh both sides before making a decision. Let’s break it down:
Benefits
Rental income: As we mentioned earlier, renting out your first home can generate extra income. In turn, you can use that income to cover the mortgages, pay property taxes, or even save for profit.
Property Appreciation: Properties tends to grow in value over time. In that case, your first home could become more valuable, contributing more rental income.
Diversification of Assets: Owning a rental property diversifies your investment portfolio. In other words, it doesn’t tie your wealth to one asset, e.g., savings and stocks. This diversification provides a buffer against potential financial downturns.
Risks
Financial strains: If you buy a new property as you’re tied to another mortgage, it can bring on financial difficulties. This is especially true if you haven’t found tenants for your rental home, or if the rental income doesn’t cover the mortgage payment.
Property management challenges: Needless to say, it can be challenging to manage two properties at once. You’ll need to juggle tenant issues, maintenance requests, legal paperwork, and more from both sides.
Legal and regulatory issues: At the best of times, it can be confusing to navigate local laws regarding tenants, leases, and property management. Even if you ignore a law purely by accident, the courts likely won’t be so forgiving. You could encounter legal problems and heavy fines.
Get Professional Help for Buying a Second Home and Renting the First
Buying a second home and renting out your first can be a lot of work. It requires careful planning, money management, and market knowledge. While it’s a great way to invest, it can quickly become overwhelming if you don’t approach it correctly. That’s where property management professionals come in.
At Bay Property Management Group, we specialize in all things property management. From marketing your home and creating a lease to handling daily tasks, legal processes, tenant screening, and more—we’ve got you covered. Let us take the burden off your shoulders and manage your rental property. Reach out to us today to have a more passive investment.
