Buying a second home is certainly a big real estate investment decision. Many real estate investors consider buying a second home in order to rent out their first property. However, it is logical to wonder whether or not financing a second real estate investment is a good decision for your business. The truth is that it really depends on the specific situation. Sometimes, buying a second home might turn out to be the best real estate investment decision you have ever made. Other times, it might turn into a disaster for your business. Nevertheless, here are a couple of factors which would typically indicate that buying a second home is a good real estate investment opportunity.
#1 Becoming a Real Estate Investor
We should first mention that buying a second home in order to rent out the first one might be a perfect decision if you are just considering becoming a real estate investor. The reason for this is that you are already familiar with the local housing market of your first investment. This will make it much easier to decide on the rental strategy for the property- a short term rental or long term rental. Additionally, by knowing the market’s condition, you can better assess the supply-demand relationship. The latter is of crucial importance when deciding how much to charge for rent as well as thinking of a marketing strategy.
However, your willingness to be involved in real estate investment strategies is simply not enough. There are other criteria to meet in order to ensure the development of your real estate investing business. Interested in learning how to become a real estate investor? Make sure to read “How to Become a Real Estate Investor vs. Real Estate Developer vs. Real Estate Agent.”
#2 The Location Has Potential
The next thing you should evaluate before buying a second home to turn your first one into an Airbnb rental or traditional rental is the location. You should be absolutely sure that the local housing market will be a good place for one of the rental investment strategies. For instance, for Airbnb rentals, you should consider aspects such as tourist attractions, interesting places to see, or business meeting points. In general, you should explore if there is something to attract short term visitors nearby. Moreover, you should make sure that your short term rental is in a location accessible by public transportation, has the necessary facilities nearby, and so on and so forth. When it comes to traditional rentals, job opportunities, universities, and a steady economy indicate the potential prosperity of the investment. After all this being said, be mindful when buying a second home and renting out the first one.
#3 The Expected Rental Income Is Profitable
Expert real estate investors know that the best real estate investments are the ones which generate positive cash flow. This means that the expected rental income of a property exceeds the potential rental expenses. In order to calculate the expected rental income of a property, you can conduct real estate market analysis and compute the market value of your property. After knowing the value, you can calculate the rent as 0.8% to 1.1% of that number. Or, you can simply use Mashvisor’s investment property calculator.
When calculating the rental income and the potential profit you will make, make sure to keep in mind all potential costs as well as any possible tax deductions you can benefit from. If the results reveal that the property will generate profit, then it is most likely a good investment opportunity. What’s more, if the property is generating enough money, it might partially or fully cover the mortgage payment bills when buying a second home. Sounds like the perfect plan, doesn’t it? Curious to learn more about the rental income? Make sure to read “Real Estate Lesson #1: Rental Income.”
#4 Your Property Is Amongst the Best Real Estate Investments on the Market
After you have made sure that your investment property is placed in a profitable location and will potentially generate a great rental income, there is one more thing to think about. This is, namely, if your property has a competitive advantage over the other rental properties nearby. You need to make sure that your property is among the best investments on the market. Additionally, ensure that there is a reason tenants will prefer to rent it over others.
Interested to know the truth about the best real estate investments? Make sure to read “The Truth About the Best Real Estate Investments.”
#5 Our Advice for You When Buying a Second Home to Rent Out the First One
Here are a few more tips from us to help you make sure that your real estate investing business is growing instead of losing money. Here are the steps to take when buying a second home in order to rent out the first one.
The Optimal Rental Strategy
As previously mentioned, the location predetermines the optimal rental strategy for your investment. It is advisable that you explore the local housing market in-depth. Carefully observe whether long term rentals or short term rentals would fit better in the specific state, city, and neighborhood. That is an important step in learning how to make money in real estate.
Part-time Real Estate Investor or Full- time Real Estate Investor
Additionally, carefully consider what type of an investor you would like to be. It is often the case that when buying a second home and renting out the first one, people want to become part-time real estate investors and have a rental as a side income generating asset. However, other people consider becoming full-time investors and take this investment strategy as the first step of their career. Either way, carefully think through this step as each investment strategy requires a specific approach.