Step 1: Consider Your Financing Options
If you’re a homeowner thinking of starting a vacation rental business through buying a second home out of state, you’re probably thinking of getting an FHA loan to finance the purchase, right? They require only 3.5% of the purchase price as down payment and are easy to qualify for. However, FHA loans are intended to encourage homeownership so, unfortunately, they’re not available for a rental property that you don’t intend to occupy as your primary residence.
This is why most real estate investors finance their investment properties with conventional mortgage loans. An advantage of these loans is that they finance any type of home you plan to buy (i.e. single-family homes, condos, townhouses, and multi-family homes). However, a few things to keep in mind before buying a second home for investment with a conventional mortgage loan include:
- They require higher down payments. Rental property investors typically have to put down 20% of the purchase price. So, make sure to set aside money for a down payment after you have your total budget fixed.
- You need to have at least a 620 credit score. Of course, the higher your credit score, the better interest rate you’ll receive. Thus, work on getting your credit rating as high as it can be before applying for a second mortgage as a real estate investor.
- Lenders will look at your debt-to-income (DTI) ratio. If you have a mortgage on your primary residence and want to get approved for a second mortgage, you’ll need to have sufficient income to cover both mortgage payments. The DTI ratio is your total monthly debt payments divided by your monthly pre-tax income. According to NerdWallet, a good DTI for property investors is 36%. Higher DTIs could mean you’ll pay more interest or you may be denied a loan.
Step 2: Analyze the Real Estate Market for Buying
Property investors know the importance of performing a real estate market analysis before buying investment properties. This is especially important for those thinking of buying a second home for investment out of state! So, spend as much (if not more) time to research the real estate market as you would when buying a rental property in your market.
Look into specific factors like the strength of the local economy, median property prices, housing market trends, zoning laws, property tax rates, convenience, and amenities, etc. Furthermore, since you’re buying a vacation home rental, investigate tourism trends in the area as well. This is because while renting out a vacation rental on sites like Airbnb can be a great source of rental income, this investment is heavily dependent on tourism.
What’s the point of buying a vacation home rental if the area doesn’t attract tourists and travelers? To assure that you’re buying a second home for investment in the best location for an Airbnb investment, make sure the housing market has a high Airbnb occupancy rate. This allows you to count on the investment property to generate rental income, positive cash flow, and yield a good return on investment.
In addition, one of the most important things to check is that you’re buying in a location where Airbnb is legal! Furthermore, some cities set short-term rental regulations that could affect your investment. So, make sure you choose a state where it’s legal to buy property and rent it out on Airbnb with minimum restrictions.
Step 3: Decide What Type of Home You’ll Buy
Just like the location, the type of investment property you plan to buy is also an important factor to keep in mind before investing in vacation rentals out of state. The costs and demands of owning a single-family home are different from those of owning a condo for example. Which is the best type of rental properties for you will depend on factors like costs, location, and upkeep/maintenance.
For example, a condo typically requires less maintenance than a single-family home, since it’ll be part of an association which runs and maintains the units in the community. However, owners of condos have to pay for that maintenance in the form of monthly fees and special assessments. Therefore, as a real estate investor, you have to do your homework and due diligence by weighing the pros and cons of investing in each property type as a second home to find which one best suits you.
Another tip is to find real estate comps (comparable properties) in the area. Looking at rental comps will give you an idea of the sale price, rental income, and occupancy rate of the property you’re eyeing. You can use this data as a rough guide to assure that buying a second home for investment will, in fact, bring you good returns. You may talk directly to real estate agents for comp data.
Alternatively, you can get them right here on Mashvisor! Simply visit the Property Page of the property you’re interested in and you’ll see information of comparable Airbnb (and traditional) listings. The type of data you’ll get includes the occupancy rate, nightly rent price, average monthly rental income, reviews and more!
Interested in giving it a try? Start out your 14-day free trial with Mashvisor now.
Step 4: Start Your Property Search
Some real estate investors forgo working with an agent when searching for and buying a rental property. That’s fine if you have the experience and are investing in your area. However, if you’re planning on buying a second home for investment out of state, then you need an agent who works in the housing market where you want to invest – preferably one with at least 5 years of experience. The reason for this is simple: a real estate agent will have more knowledge about the market and will be your advocate throughout the buying experience. Thus, a good agent will help you narrow down your property search until you find the best fit.
If you’re still considering searching for a property without the help of an agent, we can help you with that. Our Property Finder Tool is designed to help real estate investors find the most profitable rental properties in any city and neighborhood in the US housing market. Using different filters, you can easily set your criteria and immediately get a list of properties that match.
As you can see, you’ll get data regarding each property’s listing price and estimated value. Not only that but you’ll also get the cash on cash return of the property whether you rent it out traditionally or as an Airbnb rental! This helps to assure that you’re buying a second home out of state that fits your investment needs and is profitable as a vacation home rental.
Step 5: Make a List of Possible Expenses
The next step after finding a good rental to buy is to add up all the likely expenses of owning a vacation home rental. Can you fit these expenses into your budget and still have room for positive cash flow? If yes, you’ll be building equity in your second home. But if buying a second home for investment leaves you with negative cash flow each month, you may want to reconsider this investment. Here are some monthly expenses for a real estate investor to consider when buying a vacation rental out of state:
- Property taxes, which differ from state to state
- Basic utilities
- Upgrading/maintenance expenses
- Mortgage payments
- Property management services
Since you’re buying a second home for investment out of state and can’t manage it yourself, property management fees will be a big cost factor in your calculations. These companies provide numerous services like marketing the property to attract Airbnb guests, cleaning it after their departure, answering guest questions, keeping your reviews in check, updating your listing page on the site, and the list goes on. There’s no reason to not hire Airbnb property management, especially when your rental property is located out of state. Just make sure to include property management fees in your budget.
Step 6: Don’t Forget to Run the Numbers
As a real estate investor, don’t rush into making an offer on an investment property for sale before running the numbers and calculating potential profits. Just because you found a comparable single-family home that rents for $2,000 a month, that doesn’t mean that the single-family home you’re eyeing also rents for the same amount. Moreover, investment properties have different profitability based on a number of metrics. This is why you need to run these numbers and analyze the profitability of buying a second home for investment.
To do so, property investors use an Investment Property Calculator. This tool will do all the calculations for you after you plug in the numbers. For example, Mashvisor’s calculator uses historical and predictive analytics to estimate the return on investment on a real estate property (as a traditional or an Airbnb rental). Simply plug in your loan terms, down payment, purchase price, expenses, and the other necessary numbers into the calculator. You will immediately see your cash flow, cap rate, cash on cash return, and the optimal rental stagey!
It’s a versatile investment tool for real estate investors to efficiently analyze and compare different rental properties in the same location to find which is more profitable for real estate investing. To start analyzing the best investment properties in your city and neighborhood of choice using Mashvisor’s Investment Property Calculator, click here.
The Bottom Line
Buying a second home for investment is a big decision, especially if you’re buying out of state. Still, this is a great strategy to make money in real estate and have a place of your own to enjoy your vacations. So, if the thought of owning a second home never occurred to you, maybe you should give it more thought. Don’t worry if you’re a beginner real estate investor – Mashvisor will provide you with the tools you need to succeed and stay ahead of the real estate investing game!