4 steps to successfully buying a new home and renting the other

 

Did you ever give any thought to the steps necessary to successfully buy a new home and rent the other?  Probably not. However this is a great way to get started in real estate.

It's pretty common that when we buy our first home,  we don't have a lot of cash to put down.  When we sell that property a few years later we might not have a lot of equity in the property.  It might make more sense to sock away cash for the down payment on your new home and keep the other property as a rental.

I have a great article from my friend Satinder Haer of Zillow on 4 ways to successfully buy a new home and rent the other one.  As usual, she has written a very insightful guest post.

 

This Can Be Tricky at Times; 4 Steps to Buy a New Home and Rent the Other

At some point during home ownership, you may decide it’s time to upgrade to a new home and rent out your existing one. While this is a common path into real estate investing, it can also be a tricky financial endeavor. Factors such as home equity, diminished purchasing power and tax implications can impact your ability to successfully own two homes. If you’re considering buying a new home and renting your current one, use these tips to facilitate a smooth transition.

 

Step 1. Determine Your Purchasing Power

Purchasing a second home is a big financial undertaking, therefore it’s critical to understand how your existing home loan will impact your ability to qualify for a second loan. Lenders typically evaluate factors such as your debt-to-income ratio, monthly income and credit score. Homeowners who haven’t built enough equity in their current home might struggle to obtain lender approval for another home loan because their debt-to-income ratio is too high due to their existing mortgage. Calculate the numbers on your own or meet with a lender and have them evaluate your purchasing power.

Once you have a clear understanding of how much you can afford to spend on a new house you can either get pre-approved for a mortgage or opt to delay the purchase in favor of improving your purchasing power.

 

Step 2. Calculate Your Rental Income

Your local real estate market will play a large role in determining whether your home will be a profitable rental property. In some areas rental demand is weak or rents are not high enough to generate a positive cash flow for the owner. Research how much similar homes in your area are currently renting for. Is there enough demand for rentals in your area? Would the rent for your home cover the mortgage and maintenance? Would it generate any additional cash?

It’s best to avoid a negative monthly cash flow, even if you anticipate the property’s value will appreciate over time; otherwise you’ll have to dip into your own pocket to cover the difference each month. Crunch the numbers to decide whether retaining your house as a rental property makes financial sense.

 

Step 3. Research Tax Considerations

Many people are surprised to find out the complicated tax implications of owning a rental property. Some important aspects to consider before renting out your home:

  • Rental income is taxable
  • Home repairs can have tax consequences
  • If you eventually decide to sell your rental home, you may lose the homeowner’s tax benefit

Your rental property may have positive tax benefits but it could also have negative ones; conduct some research about how purchasing a home would impact your financial situation. You may even want to consult a tax attorney, accountant or other certified financial expert so you’re not caught by surprise when tax time rolls around.

 

Step 4. Find a Home and Renters

After you’ve calculated all the numbers, you might find that buying a new home and renting out your current one is truly a favorable situation. Work with an agent in your area to find a new home and complete any projects you’ve been putting off to spruce up your property for potential renters.

If you decide to self-manage your rental property, put up free rental listings and start looking for tenants as soon as you move out to avoid carrying two mortgages during the vacancy. Prioritize finding tenants with a good rental history, solid income and a clear background check (if you conduct one). Being a landlord can be significant work if your renters are late with payments or otherwise difficult.

Take the time to explore your options and decide if buying a new home and renting your existing one is the correct decision. While it requires a lot of work upfront, it can also be a profitable endeavor if your personal finances and real estate market are conducive to being a landlord. However, being a landlord isn’t for everyone. Don’t make the leap unless the numbers confirm that your home would be a good rental property and you’re ready to take on another home purchase.

 

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