Having another real estate property can be a very lucrative idea when you weigh in certain factors, regardless of whether you use the first one to live in or rent out. In fact, many homeowners as well as real estate investors who are successful in renting out one of their income properties often think about investing in their second or third property. How do you decide when it’s a good idea to begin thinking about buying a second home to rent out? Here are a few factors you may want to consider before making this real estate investment decision:
Are you able to afford another down payment?
Although a real estate investment property generates positive cash flow, it also requires a hefty down payment. Particularly, a down payment of no less than 20 % is encouraged in most cases. Coming up with the 20% down payment on your first real estate property – whether your own home or a rental – was not easy; now you must think of how to come up with the money to put down for your second property.
If you decide on buying a second home to rent out, you will want to make sure that you have sufficient cash available for a down payment. It’s definitely a good idea to invest in more than one real estate property, but making sure you are able to make the necessary payments on your second home is crucial in order to avoid financial distress. In order to figure out how much of a down payment is required when buying a second home to rent out, contact an experienced lender that can guide you through the process.
Related: Why you shouldn’t put less than 20% down payment
Will you be able to afford paying for maintenance?
Regardless of whether your first real estate property is a rental property or your own home, buying a second home to rent out requires some serious maintenance. Unexpected repairs will inevitably come up with tenants, and you must be willing and able to maintain and repair your properties, particularly for your tenants. The general rule is to have 2% of the home’s sale price set aside for covering the annual maintenance costs.
The maintenance of one real estate property can be a headache; now imagine what it will be to be responsible for the maintenance of two different properties. Are you up for fixing the broken AC problem that your tenant has? If you have the patience and/or the skills to do that, and if you have 2% of the property price set aside specifically for the home’s maintenance, then thinking about buying a second home to rent out will start to look like an attainable goal.
How can you find an experienced lender?
Lenders look for many things when you decide to invest in your first real estate property: your credit, down payment, and financial history all play a role in getting a loan. With a second property, lenders want to be sure that you will be able to pay back the amount of money that you owe. Moreover, lenders tend to look at your debt-to-income ratio, which is the amount of money you pay each month for things like student loans and other bills in comparison to your actual income.
According to the editors of Kiplinger’s Personal Finance, when buying a second home to rent out, the standards for getting a mortgage are much more difficult to cover than with your first real estate property. However, if lenders notice you were able to pay off your loans in a timely manner with your first property, they may be more willing to help you finance your second real estate property. In addition, your first property may play a role in helping you decide if buying a second home to rent out is a good idea for you.
Related: House Hunting Lessons or Real Estate Investors
What should you do with your first home?
Depending on what you will do with your first real estate property, buying a second home to rent out may increase your cash flow. Do you also plan to rent out your first real estate property? Or do you plan to live in it? If you are planning to live in your first home, you should consider that you will be paying your mortgage payments out of your pocket for that particular property. When buying a second home to rent out, tenants will help pay your mortgage, but you will also be faced with the maintenance costs of the property. You will need to consider if you want to rent out the second home as a long term rental or a short term rental.
Before you make your decision, look at your rental strategy. If you consider buying a second home to rent out as an Airbnb short-term rental property, you will be responsible for the extra expenses, including furniture, cleaning, and repairs. Moreover, you will need to decide if you want to invest in a single family property or a multi family property.
Related: Choosing the Right Investment Property for Your Short or Long Term Rental
Buying a second home to rent out may be one of the best financial decisions you decide on taking. With the proper real estate investment tools and following all the steps required, you will be on your way to financial freedom as a real estate investor. If you are able to afford the down payment and monthly mortgage payments as well as the maintenance costs when buying a second home to rent out without breaking the bank or taking money from your retirement fund, then this venture may be for you.
Don’t forget to do your research when searching for a second home to rent out. Mashvisor has thousands of properties in the best locations, providing you with an array of options and allowing you to maximize your real estate investment benefits when buying a second home to rent out.
