At the end of 2023, my husband and I decided to buy a second home and rent the first. It was great timing because we started seriously looking at buying a second home in January 2024, which meant we didn't have much competition, interest rates had dropped a bit, and many homes had lowered their listing prices significantly. It didn't matter that it was a bad time to sell because we were buying a second home without selling the first. We also found an experienced real estate agent who owned 5 rental properties. He gave us advice not only on how to buy a great second home but also on how to be landlords and get our first home ready to rent.
But even with a solid team, it was a steep learning curve! We ran into several obstacles and unexpected expenses along the way. Our property management company also missed some crucial requirements for our business license from the city, which resulted in extensive renovations we had to conduct while the tenants were in the property. (Spoiler alert: they were not happy and we had to discount the rent for a few months.)
All that said, our agent's experience was crucial in getting this over the finish line. That's why my main advice is this: find a super solid agent to help you pull this off. Now, here are some other things to also keep in mind to help you buy a second house and rent the first.
7 steps for buying a second home and renting the first
Aspiring to buy a second home and rent the first is impressive! Especially considering that 60% of Gen Z worry they might never own a home. But before you can turn your first home into a rental property, you need to make sure you have the cash and income to back it up.
Rental properties can be profitable long-term, but only if your numbers can handle real-world friction: vacancies, repairs, and periods when you’re paying both mortgages. Nationally, rental vacancy rates have hovered around 7% recently, so it’s smart to plan for downtime even if your market feels tight.[1]
A safer approach: run your best-case and worst-case scenarios (rent comes in on time vs. you’re vacant for a month, or you get hit with an unexpected $5,000 repair). If the deal only works in the best case, it’s probably not ready yet.
Sell your first home home with a top Clever agent, save thousands on commission.
Clever vets agents based on performance from Berkshire Hathaway, Keller Williams, and hundreds of other top brokerages and negotiates lower insider rates on your behalf. When you work with Clever, you can sell for just 1.5%—roughly half the traditional fee.
1. Make sure you can afford mortgage payments and maintenance costs for both homes.
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? Are those prices realistic for your home and area? Use a rental property calculator to run through all the possible scenarios.
We originally listed our home to rent for $300 more than what it ultimately rented for. After a few weeks of several showings with no bites, our property management company advised that we drop the rent $100. That happened two more times before we finally got renters. Luckily we had enough buffer that it still made financial sense to rent our first house, but it was a bummer to lose out on $300 a month ($3,600 a year). And since finding tenants took longer than expected, we had to cover the mortgage for our first and second homes for a few months.
2. Check your mortgage paperwork before you rent the home.
If you bought your home with an owner-occupied (primary residence) mortgage, your loan documents typically require you to move in within a set time frame and to intend to occupy the home as your primary residence (often for at least a year), unless your lender agrees otherwise or you have legitimate extenuating circumstances.
Before you list the house for rent, pull your note or security instrument and look for the “Occupancy” language. If anything is unclear, call your lender and ask two direct questions:
- “Does my loan allow me to convert this property to a rental now?”
- “Do I need written approval, or is notification enough?”
If you rent the property out sooner than your documents allow, you could be in violation of your mortgage terms. In the worst case, your lender could treat it as a default or require changes to the loan.
3. Talk to your homeowners insurance carrier.
Your current homeowners insurance carrier will need to be notified if you rent out your home because you'll have to change your policy to rental property insurance. This insurance functions differently than homeowners insurance, so you'll want to wait to put this policy in place until after you move out of the home.
We asked our insurance provider to make the policy switch from homeowners to renters insurance the day after we moved all our stuff out. Ideally your renters will also have renters insurance (you can require them to have it as the landlord), which will help cover their personal belongings and any damage they cause. But your rental property insurance will cover the physical structure of the property from things like storm and fire damage, but it will no longer cover your personal belongings in the house. That's why it's important to wait to convert your policy until after all your stuff is out.
4. Understand the tax implications of owning a rental property.
Owning a rental can create meaningful tax benefits, but it also makes your filing more complex. We talked to a CPA before we listed our home, which helped us understand what we could deduct and how to keep clean records for the taxes on the rental property.
In general, rental owners may be able to deduct eligible expenses tied to operating and maintaining the property (things like mortgage interest, property taxes, operating expenses, repairs, and depreciation), as long as they follow IRS rules for rental activities and recordkeeping.
We also set up an LLC for administrative and liability reasons. But an LLC doesn’t automatically change your taxes. The “right” setup depends on your state, your insurance coverage, and how you plan to operate the rental. This is why it’s important to get advice tailored to your situation from a qualified tax professional (CPA or enrolled agent), and sometimes an attorney.
5. Find good tenants to rent your first house.
Finding good tenants is absolutely essential. Difficult tenants are nightmares and can seriously damage your home, cost you thousands, and even force you to take them to court during eviction proceedings. Part of why it took us a few months to find renters is because our property management company has very strict criteria with their tenant screenings to ensure their .03% eviction rate.
We didn't want to deal with tenant screenings, which is part of why we hired a property management company.
If you screen tenants yourself, build a consistent process (and follow fair housing rules and consumer-reporting requirements). The FTC notes that tenant screening reports can include credit, rental, and criminal history, and those reports are covered by the Fair Credit Reporting Act (FCRA).[2]
6. Decide how you’re going to manage the property.
We opted to go with a property management company primarily for time protection. Our first house is about an hour away from our second house, so we really didn't want to be making that drive in the middle of the night to fix a toilet. They also handle all the logistical aspects of running the property, communicate with the tenants, keep records of expenses, and update us on all this via email. They charge us 8% of the rent (the industry standard is 8–12%), which is well worth it for us.
That said, not all property managers are good or worth the fee. We interviewed several before settling with the company that we did, and we still have had several moments where we weren't happy with them. But those moments were much less stressful than what would've happened if we were handling the property ourselves. That said, it still might not make financial sense for you to hire a property manager.
No matter who manages the property, confirm the “must-do” compliance basics for your area:
- Required rental licenses/registrations
- Safety requirements (smoke/CO detectors, handrails, egress rules, etc.)
- HOA/condo rules about renting (including minimum lease terms)
- Local rules around security deposits and notices
This is the step that prevents the nightmare scenario: signing a lease and then discovering you can’t legally rent without upgrades or paperwork.
7. Set up your financial infrastructure.
Prior to renting out your first house, it’s a good idea to ensure you have a solid savings account to cover any repair and maintenance costs. And make sure there's a lot more in there than you think you'll need! We also set up a business checking account to collect rent. That way it's easier to keep all our finances connected to the rental property separate. You'll want to connect with a financial professional to decide what setup will work best for you.
We unexpectedly had to turn our two basement windows into egress windows with window wells to receive our business license. This ended up costing $15,000 and took two months to complete. We also had to give the tenants a discount on the rent as well while the construction was underway since they were already in the house. A few months after that, a toilet broke. And then a few months later, the A/C broke in the middle of summer. Since we're in it for the long game with this property, it was worth the maintenance costs. But they were certainly higher than we expected.
Pros and cons of renting out your first home
Although buying a second home and renting the first can be an awesome financial move, there are inherent risks and downsides you should be aware of as well. It's important to weigh all the factors before deciding which risks you're ok with and which ones you want to avoid.
Pros of renting out your first home
- Generating passive income
- Tax breaks and benefits
- Increasing your net worth and assets
- Building equity in your home
- Taking advantage of property appreciation
- Flexibility to move back in if you need to
Cons of renting out your first home
- Decreased property value from tenant wear and tear
- Tax filings are more complex
- Acting as landlord and property manager
- Unexpected expenses from repairs, vacancies, etc.
- Lots of local regulations and laws to be aware of
How to buy a second home
Whether you utilize a conventional loan, take out a HELOC, or buy a home in cash, buying a second 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, so here’s what you need to know to help you make the right decision.
1. Talk through your options with your financial advisor and mortgage broker.
Buying a second home means double the financial burden (or even more, depending on how expensive your second home is), but savvy financing can 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 with a second mortgage. Consulting with a financial advisor and your mortgage broker can help you get a clear picture of what is realistic for you.
Since we purposefully put the mortgage for our first home in only my name, that made it much easier for us to buy a more expensive second home because we could put the second mortgage in my husband's name since he had no mortgage debt on his credit history. We talked with our mortgage broker to see how much we could qualify for on our second home and deliberately picked a home that was well under our budget to make sure we could easily afford both mortgages if we needed to.
2. Consider using a home equity loan or HELOC to help with your down payment.
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. Just keep in mind that you'll also have to make payments on the HELOC funds as part of the mortgage on your first house. This is one reason why we opted to use our own cash for the down payment rather than a HELOC. HELOC repayment plans are typically interest only for the first 5–10 years and then they switch to interest and principal payments. This can be a good option if your mortgage is relatively low on your first house and you've lived there a while so you have significant equity in the home.
Some lenders will also be hesitant about using borrowed funds for your down payment on your second home. You'll need to check with your mortgage broker to make sure this is a valid option for you before you proceed. Another important thing to note about a HELOC or home equity loan is that typically it's much easier to access those funds when you're using the house as your primary residence. Once you no longer live there and the house is a rental property, you may not be able to take out a HELOC or home equity loan at all and you'll certainly be subject to stricter lending criteria and higher interest rates.
3. Explore your loan options for your second mortgage.
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.
Depending on how much you have available for your down payment, it may be worth exploring FHA loans or VA loans if you're eligible. Although FHA loans have stricter requirements for what type of home you buy, they only require 3.5% down if you have a credit score of 580 or higher. If you're buying a home with bad credit, you'll have to pay 10%. You'll also need to meet certain debt-to-income ratio requirements. Each county also has max amounts that are allowed for an FHA loan, typically below $1 million.
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 that 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. That said, you can usually refinance at the right time if you'd like to. If you have more cash available at a future date and interest rates drop, you can refinance to get a lower mortgage payment with more money down.
Are you ready to buy a second home and rent the first?
Once you've evaluated your financial strategy and secured your home financing with a pre-approval, your next step is finding an experienced, reliable agent to guide you through the process. Just like with every decision that comes with renting out your first house and buying a second, it's important to thoroughly vet your options and interview several people to get a feel for what's best for you.
Clever Real Estate is a great option for finding vetted, high-performing agents. Clever does the work for you by only accepting the best agents from brokerages like Berkshire Hathaway, Keller Williams, Century 21, and more. Our highly trained concierge team will carefully prepare the best matches for you based on what you're looking for. And, as a bonus, you'll get a homebuyer rebate when you buy with a Clever agent. Answer a few quick questions to find the best local Clever agents in your area.