Buying a second home to rent out is one of the best ways to set your foot in the real estate investing business. But what can you do to guarantee success? Although the process is not complicated, it is delicate. This might be your chance for testing the waters if you are considering becoming a real estate investor. Therefore, you want the first experience to go as smoothly as possible. So, we thought there are a few steps to buying a rental property that require special attention from you and, in this article, we want to discuss them in more detail.
Related: Steps to Buying an Investment Property for Beginners
Step 1. Mortgage Shopping
Before buying a second home to rent out, you need to consider mortgage shopping.
There are various options that you could go with to finance a second home. The best option would be conventional mortgages. This type of mortgage is perfect for single-family homes, multi-family properties, and condominiums. However, you’ve got to be ready for a down payment of at least 20% (you might be able to pay less even though we do not recommend less than 20%). As for other types of mortgages such as FHA and government loans, they have more specific requirements and might not be the ideal choice of financing since they do not support buying an investment property. In other words, unless you specifically plan on buying a small multi-family home and you intend to live in one unit, it will be challenging to qualify for this type of loan.
Other options for investment property financing include hard money lenders. These are usually private entities that provide funding for various businesses including real estate investing. One pitfall of this financing strategy is that it’s short-term, meaning you’ll have to repay the loan in a matter of 6 months to 3 years at the very latest (depends on the agreement between you and the lender). Therefore, it makes it a less convenient method to finance a rental property.
How to Qualify for a Conventional Mortgage
Conventional mortgages are not hard to qualify for if you are considering buying a second home to rent out. As long as you have a steady job and a good credit score, the rest is easy to work out. Typically, you will need a credit score of no less than 620 (the higher, the better). Another factor which increases your chances of getting approved for a loan is having a down payment of 20%. For that, you will need to get your finances in order, make sure you do not have a high debt-to-income ratio (no more than 45%) and have no recent history of bankruptcy or foreclosure.
Step 2. Choose an Investment Strategy and a Property Type
At this stage, you are still putting together a plan for buying a second home to rent out. Therefore, after you have researched your mortgage options, you need to look into the rental strategy and what type of investment property is best for you. You can do that through researching the real estate market in the specific location you are looking into.
Related: How to Research Real Estate Markets: The Beginner’s Guide
Since we are talking about a rental property business, there are two main rental strategies you can work with: long-term rentals and short-term rentals (Airbnb). For long term rentals, the best type of property is generally single-family homes and multi-family homes. On the other hand, studio apartments, villas, and cottages are the best for short-term rentals.
Step 3. Hire a Real Estate Agent
Buying a second home to rent out might be challenging, especially if it’s your first time. Therefore, we strongly suggest that you work with a real estate agent. Here are a few advantages of doing so:
1. The primary benefit is obvious: the real estate knowledge and experience in the field a real estate agent can provide.
2. A real estate agent knows what to look for when buying a second home for rent. A rental property, as in this case, must show specific numbers during the rental property analysis. For example, you should be looking for a high cap rate, high cash on cash return, that is, in addition to indications of positive cash flow.
The Many Uses of the Real Estate Investment Calculator include performing a rental property analysis!
3. Real estate agents know the best places to buy rental properties because they have the skills to perform a neighborhood analysis. This will be especially useful if you already have a rental strategy in mind.
4. An agent can help you analyze the property price and decide if it’s worthwhile. Many beginner real estate investors end up buying above market value due to lack of experience.
5. Real estate agents are professional negotiators. Well, we know that some people are good at negotiating as well, but in this case, we are talking about someone who has been in the real estate business for a while so they know how to negotiate a good deal.
6. Last but not least, agents have the right professional connections. Agents have relationships with professionals who can be of great assistance throughout the process of buying a second home to rent out.
Step 4. Look into Local Regulations
The legal aspect is one of the key factors which drive the real estate industry in general. Taxes, policies, and other matters can influence the supply and demand in a particular area. Moreover, you want to make sure you know the ‘Dos and Don’ts’ of real estate in your area of investment. This way, you can avoid extra charges, fines, and any other penalties that might affect your rental property business.
Now, if you are considering buying a second home to rent out on Airbnb, then you want to pay extra attention to Airbnb regulations. To learn more about the subject, check out ‘Is Airbnb a Good Investment Considering All of the Regulations?‘
Step 5. Seal the Deal!
As simple as it sounds, sealing the deal involves many details that can affect your real estate transaction. Your checklist should not only include making an offer, but it should include the following as well:
1. A title search to make sure there are no liens against the investment property that you might end up committing to unknowingly.
2. Paying your dues to the real estate agent who helped you with buying a second home to rent out.
3. Dealing with the legalities of the sale and completed all the necessary paperwork.
4. Any other details required to close the deal.
Now that you know the steps of buying a second home to rent out, you are probably wondering exactly how to find a rental property for sale. Real estate investment tools are the answer for you! Since buying a second home to rent out is challenging, it is best if you use tools that will guarantee accurate performance. In this way, you can become a successful real estate investor in no time. Try Mashvisor’s heatmap analysis tool and property finder to enjoy choosing from the list of the best investment properties out there! Sign up to get started now.