How to Buy a Second Home and Rent the First: 7 Tips & FAQs

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By Clever Real Estate Updated August 8, 2022


Buying your first home was hard enough, and now you want to buy a second and become a landlord by renting out the first? Kudos. It’s not easy, there are a ton of things to check off, before you’re even able to buy your second home. No worries though, we’ve got everything covered.

Illustration of two houses next to each other

So, you’ve decided to buy a second home and rent the first one out — great, now you have to figure out the steps needed to make it happen. Funding the purchase of your second home, becoming a landlord, and understanding the financial implications of multi-homeownership, sounds like a lot. Get in touch with an experienced real estate agent to help you begin the journey of buying a second home.

Luckily, we’ve prepared an ultimate guide, jam-packed with all the information you need to make the successful transition from homeowner to a home-owning landlord. Here’s what you need to know about renting out your first home.

Why turn your home into a rental property?

The upfront costs of purchasing a second home deter a lot of potential buyers, especially those who are already dealing with the costs of their first home. However, shifting the costs of the first home to tenants by renting it out creates potential passive income and tax benefits. Unfortunately, it also means that homeowners take on the job of managing a property and becoming a landlord.

Pros and Cons of Renting Out Your Home

Be forewarned, buying a second home and renting out your first is not an easy venture. Fortunately, it pays off in the long-run, especially if it’s carefully planned and executed. You’ll have to decide if it’s right for you.

Pros of Renting Out Your Home

  • Generating Income
  • Tax Breaks and Benefits
  • Increasing Your Assets
  • Starting Your Real Estate Investment Journey

Cons of Renting Out Your Home

  • Tax Filings are More Complex
  • Acting as Landlord and Property Manager
  • Costs

Can you rent out a house you have a mortgage on?

It’s possible for homeowners of renting out a mortgaged home. You’ll need to check the fine print of your lending agreement to find out whether you’re allowed to make your first home a rental property.

Some lenders have clauses against rental properties and others have stipulations that require you to wait a certain period. If you find that your lender doesn’t allow renting, it may be possible to refinance with another lender that allows the change.

Tax Implications of Renting Out Your House

The classification under which your home qualifies will have a major impact on your tax filings. A tax attorney is an excellent resource for deciphering the complex language of the IRS. The most important aspect of the tax implications of renting out your home is determining whether your first home qualifies as an investment property or a vacation home.

Don’t make the mistake of thinking that’ll you’ll be able to deduct your mortgage interest. Tax laws change all the time and as of 2019, mortgage interest deduction is nonexistent. There are many other deductions that apply to rental properties, common expenses are:

  • Repair and Maintenance Costs
  • Realtor Commission Fees
  • Mortgage Valuation Costs
  • Eviction Costs
  • Depreciation Costs
  • Property Purchase Legal Fees

How to Afford Two Homes

Whether you utilize a conventional loan, take out a HELOC, or pay in cash, buying a home will have a major effect on your finances. To successfully pull off buying a second home, you need to determine your financial health and assess your options. It’s essential to choose the right method of funding the purchase of your second home, here’s what you need to know to help you make the right decision.

1. Evaluate Your Finances

Buying a second home means double the financial burden, but savvy financing can help to save you money in the long run. Whether you use a HELOC, a conventional loan, or buy with cash, you can expect higher interest rates, increased down payments, and more stringent income requirements.

However, consulting with a financial advisor can help you understand your financial needs. Anticipating the costs associated with buying a second home is essential as you’ll be taking on a debt that you must pay off on a monthly basis.

2. Take out a Home Equity Loan or HELOC

Home equity loans and HELOCs allow homeowners to utilize the equity of a home borrowing and money against it. These loans are typically used to make renovations on homes, but they can also be used to fund a down payment on a second mortgage loan.

They have many similarities but are two different types of loans. Interest rates vary among these loans and will depend on your lender. One of the biggest drawbacks to using a HELOC or a Home equity loan is the risk of losing your home if you’re unable to repay the loan.

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3. Conventional Loan Options

Utilizing Fannie Mae or Freddie Mac conventional loans is a great way to fund your second home. Conventional loans don’t have many restrictions on the types of property they can be used for. However, they require higher credit scores, proof of income, favorable DTIs, and sometimes a higher down payment.

How Much Do You Need to Put Down for a Second Home?

If you’re using a conventional loan to fund the purchase of your second home, you’ll need a down payment of 20%, in most cases. Smaller down payments of 10% are available to borrowers the meet certain financial requirements, but a larger down payment can help you qualify for lower interest rates and save you thousands in the long run.

Another way to save money is to involve the seller. Sellers are allowed to front from 6%-9% of the buyer’s closing costs and prepaid fees, as long as the buyer has financed the purchase of the home.

What to Look for in a Second Property

Once you’ve decided to buy a new home, it’s a good idea to make sure your second property is aligned with your future goals and your current needs. Once you’re sure of these, you’ll know exactly what to look for when you’re buying a home. Here are some common factors to consider:

  • Location
  • Size
  • Neighborhood
  • Cost
  • School District
  • Crime

Sitting down with an experienced local real estate agent can help you outline your needs and narrow down your options for a second home. They’ll be able to find you a home that fulfills all of your wishes and can even save you money.

How to Turn Your Home Into a Rental Property

Before turning your home into a rental property, you must do the work to ensure that it’s a profitable and sustainable venture. Preparation is the key to the success of renting out your property, here’s how to get the most out of renting out your first home.

1. Run the Numbers

Do you want to make a profit on your rental? What’s the range of the rates that you can charge for your rental property? Determine the cash flow of your rental property to decide whether it’s a profitable decision to rent out your first home. Calculate the cash flow of your investment property using our free custom spreadsheet.

2. Talk to Your Current Mortgage Lender

Check the fine print of your lending agreement to find out whether you’re allowed to make your first home a rental property. Some lenders have clauses against rental properties and others have stipulations that require you to wait a certain period. If you find that your lender doesn’t allow renting, it may be possible to refinance with another lender that allows the change.

3. Talk to Your Homeowners Insurance Carrier

Your current homeowners insurance carrier will need to be notified if you rent out your home. Your rates may change depending on whether you purchase supplemental homeowners insurance or landlord insurance.

4. Understand the Tax Implications

An experienced tax attorney will ensure that you don’t overpay in taxes on your rental property and can help to get you deductions that you might not have known your property qualified for. Current tax code allows homeowners to deduct certain expenses such as mortgage interest, insurance costs, property taxes, and other rental expenses. You can also deduct depreciation from the value of your home.

5. Find Tenants

Finding good tenants is imperative to the success of being a landlord. Difficult tenants are nightmares and can damage your home, cost you money, and even force you to take them to court during eviction proceedings. Thorough tenant screenings can help to offset the chance of these things happening. Quality tenant screening consists of:

  • Background checks on all adults over the age of 18 living on the property.
  • Ensuring that the tenant has a stable job.
  • Credit checks.
  • Following the 3:1 rent to income ratio.
  • Obtaining a tenant history.
  • Calling previous landlords.
  • Making sure the tenant has a support system.

6. Decide How You’re Going to Manage the Property

Property managers have a myriad of responsibilities that range from small repairs, landscaping, collecting rent, and communicating with tenants. If you’re renting your first home while maintaining your day job or you’re not handy, it may not be feasible for you to handle property management yourself. Hiring a property manager at the industry-standard rate of 8%-12% of the collected rent income can be a major hit to your profit margin.

7. Set Up Your Financial Infrastructure

Collecting rent, holding on to security deposits, and keeping a healthy savings fund for maintenance and repairs — landlords have the pleasure of handling all these financial responsibilities. Prior to renting out, it’s a good idea to ensure that you have a solid savings account to cover any repair and maintenance costs.

Landlords will have to determine how they want to collect rent from tenants. It’s imperative to keep a record of any rental payments whether they’re collected via mail, an online platform, or you collect the rent in-person. Not to mention, it might be necessary to set up an escrow account to hold on to security deposits from tenants.

Next Steps

If you’ve completed the initial steps in buying a second home to rent out the first, you’re ready to look for your next property. Choosing the right lender and securing financing early on, is the best way to get the process started. Getting connected with a talented real estate in your area will save you a lot of time, effort, and surprisingly, money.

A buyer’s agent will help you through buying your second home from getting you showings, putting up an offer on the home that you choose, and finally, closing on the home. Once you’re settled into your new home, you’ll be ready to begin your landlord duties on the first.

Top FAQs About Renting Out Your Home

Can I convert my primary residence to an investment property?

Yes, it’s completely possible to convert your primary residence into an investment property. Before renting out your primary residence, you’ll need to discuss the change with your mortgage lender, homeowners insurance company, and HOA, if applicable. Renting out your home will have an impact on your tax filings, but otherwise can generate a steady source of income and be a great financial investment.

How long do you have to live in your house before you can rent it out?

Your lending agreement will have details regarding how long you must wait after buying a home to rent it out. In most cases, the owner must occupy the home for at least 12 months after the transaction has been completed. Once 12 months have passed, the owner is free to open up the property to tenants.

Can I live in my investment property?

Yes, you can live in your investment property, however, there are tax implications if you do so. If you rent out your home for longer than 14 days out of the year, your rental income will become taxable and you must report it to the IRS. If you sell your investment property, it will be difficult to avoid capital gains tax under a 1031 exchange if you’ve lived in the property.

Is it profitable to rent out a house?

It can be very profitable to rent out a house. Some landlords rent out homes at rates that offset the costs of the mortgage payments, expenses related to owning a home, and generate a profit. A local real estate agent can help you run comps on similar rentals in the area so you can price your home competitively.

Is being a landlord worth it?

Renting out your home can generate passive income, but you’ll also be taking on the responsibilities of a landlord and property manager. However, with tax breaks and the potential to grow and expand in real estate investment, it’s possible to boost your profits significantly. Weigh out the responsibilities versus the profit to determine whether being a landlord is right for you.

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