Owning a second home is becoming a staple of wealth in the United States. As much as 66 percent of wealthy individuals in the US own a second home. Purchasing a second house is an excellent investment if you can fit it into your budget.
It’s a path that provides rental income you can use to pay down the mortgage on your new home and another liquid asset you can add to your investment portfolio. It’s vital to understand that you’ll become a landlord when buying a second home and renting the first.
The good news is that you’ve discovered this informative guide for the best approaches to take when buying an investment property. Continue reading to maximize your returns and find landlord tips for your new rental property today!
Analyze Your Finances
Before starting the home-buying process, the first step is to analyze your finances. It’s an excellent way to grow your wealth, but you’ll need to enjoy stable finances to make the investment property work. The situation can become dire if you pay two mortgages with insufficient income.
You’ll also want to avoid taking on too much debt when buying a second home and renting the first. It’s beneficial to look at your debt-to-income ratio. Lenders will use this information to determine if you qualify for a home loan.
Existing debt is another factor to calculate for home mortgages. The lender will examine your debt to calculate whether you can afford two home mortgages.
Review the budget you’re working with and determine if the purchase fits into it. You should also set aside money for emergencies. Unexpected expenses arise, and life happens, but staying prepared will prevent a financial disaster.
Run the Numbers
After analyzing your finances, running the numbers and determining what you can safely afford with your second house is beneficial. Look at the return on investment you’ll enjoy after purchasing the new home and renting out your first house to tenants. It’s also worth considering the money you’ll need to invest in property management.
You can hire a property manager to remove that burden or purchase software to ease the burden. Software is the cheaper solution. Look for options for accounting and tenant screening to preserve your first home.
Evaluating your cash flow is the most effective way to determine if the second house is a beneficial investment. Adding a home to your real estate portfolio that doesn’t improve your wealth is counterintuitive.
Estimate your monthly income and remove taxes and other expenses. It’s an effective way to estimate how much you’ll make from your monthly rental income.
Make a Down Payment
You can use several avenues to decrease financial strain when paying for a second home. Using your savings is the quickest and most effective way to secure a deal on your second home. Divert some of your income to a savings account dedicated to financing your new home.
You can also refinance your existing home and use the cash you gain to fund the down payment for the second house. Gift funds are fantastic because they provide money without paying staggering interest rates. Some lenders will want additional documentation for these funds, but it’s a cost-effective way to make your down payment.
It’s also worth exploring down payment assistance programs in your state and county. These programs could save you tens of thousands of dollars if you’re eligible due to Lower Mortgage Rates 2024. Research your options when buying a second home and renting the first.
Explore Your Loan Options
You’ll find several loan options you qualify for if your credit score is within a healthy range. The loans you qualify for are different when buying a second house. Most lenders use stricter guidelines when determining if they’ll help you finance your next home-buying endeavor.
Higher credit scores and more sizable down payments are standard operating procedures for lenders. The lender could also stipulate a specific time to live in the residence.
Consider using a home equity loan to finance your second home. You’ll need at least 15 percent of your home’s value in equity to qualify. The secured loan lets you borrow money and enjoy low interest rates.
Conventional loans are another viable option when buying an investment property. It’s one of the most common options when buying a second home and renting out the first. They require a 10 percent down payment with fixed or adjustable mortgage rates.
Buy Landlord Insurance
Buying landlord insurance is one of the best landlord tips after renting out your first home. You’ll enjoy peace of mind that you’re covered no matter what happens with your tenants and property. It’s different from homeowner’s insurance since it covers the tenants living in the home instead of your family.
Your insurance policy will cover instances of property damage caused by accidents, tenants, and natural disasters. You’ll also receive reimbursement for a loss of rental income if the property becomes unsafe to live in due to the events above.
Liability coverage is included with the landlord’s insurance policy. You’ll enjoy protection from liability if the tenant or a guest gets injured while on the property.
Determine Property Management
The last step is determining how you want to handle property management. If you have ample spare time, you can use it to screen tenants and manage the property. A property manager is suitable if you’re more focused on generating rental income and working your primary job.
Determine what you have time and energy for. It’s the most effective way to manage your rental property and find the best tenants.
Consider Buying a Second Home and Renting the First
Generating rental income from your home is an excellent way to bolster your finances and make ends meet, but it requires finding a new place to live. Buying a second home and renting the first solves the issue, though you’ll need to research your options for home mortgages. Determine the best path for property management and invest in landlord insurance to protect your assets.
Using your hard-earned cash to boost your real estate portfolio is an excellent way to set up a comfortable retirement. Read our Real Estate guides for more tips to make your assets work for you!