Many homeowners want to own more than one property, with the purpose of renting out the first. Indeed, this move can be financially rewarding since it gives you the opportunity to build your real estate portfolio and generate extra income. 

If you have the desire to purchase another home, make sure to know the various considerations to help you in your decision. It is also smart to work with an experienced real estate agent who can assist you through the process of buying a second property and renting out your first. Take note of these steps for that purpose. 

Ensure Your Current Home is Rentable

Your decision to rent out your current home and purchase another property will hinge on whether your first house is rentable. Hire a real estate agent to determine the level of demand for rental for similar properties in your area. You will find it difficult to rent out a one-bed-one-bath home if the renter’s demand favors a two-bed-two-bathroom house. 

Moreover, charge a realistic rent price considering you will be paying your current mortgage and taking out another mortgage on your new home. Carrying two home loans can be a heavy financial burden. So, make sure this is a feasible option for you, especially if an adequate rental income does not come immediately. 

Think of Yourself as Landlord Who Manage Tenants

In some states and cities, some regulations assure lenders that you are generating rental income before you can get financing for your second property. As a rental owner who wants to procure a second mortgage, the lender will require a deposit and proof of the rental agreement and the first month’s rent.

Moreover, think of how to manage your rental property. The role of a landlord can be cumbersome, especially if you have many tenants. You will market your rental property, screen prospective tenants, collect rent, handle maintenance requests, etcetera. However, you can hire a property manager to do those things for you. 

Determine Whether You Can Rent Out Your First House

Check your mortgage agreement whether it allows you to rent out your home. Most loan contracts specify that you should live in the property for a certain period (typically one year) before you can rent it out. Some loan agreements may preclude you from renting it out at all. So, it is advisable to read carefully what is in your loan agreement. 

Consider Your Finances

Inevitably, there are financial considerations before deciding to rent out your first house and purchase a second one. It is not uncommon that people in such a situation have to offer bigger down payments, pay higher interest rates, and meet stricter requirements imposed by lenders. 

Mortgage Considerations for Your Second Home

A 20% down payment is a requirement when buying a second home. If your financial situation makes it unlikely to pay the 20% down payment, choosing private mortgage insurance is your alternative option. 

You can also obtain a home equity line of credit or loan on your current house. You can use it to pay the down payment on your second mortgage. The disadvantage is there is a potential of paying higher interest rates and losing your property if you fail to pay back the loan. 

Rental Property Insurance

As a landlord, you must have rental property insurance to cover the costs of loss of rental income, property damage, maintenance, and liability fees. Adding to or changing your insurance policy can be done by talking to your insurer.

Talk to a Tax Attorney or Accountant

You will pay taxes on your rental property and the income you get out of it. But you can also claim tax deductions on mortgage valuation costs, agent commission fees, maintenance and repair expenses, and depreciation costs. Consult a tax lawyer or accountant to help you with filing your taxes. 

Prepare Your Home for Rent

After you sort out your finances, it is time to prepare your home for potential tenants. You can put on a fresh coat of paint or fix damaged components in your property to attract prospective renters. You do not need to make major renovations. Just a little facelift of your property, you can make it more appealing. 

With the expert advice of your agent, you can also make your home rental-ready. Your agent can help you look for a second house and tenants at the same time. 

Final Thoughts

You can buy a second home and make your first house a rental property. But make sure to consider your finances when doing such a move since you will be paying two home loans for that matter. You will also put in capital to market the rental property and cover the costs of setting it up to attract tenants. I hope this article will help you in your decision.