For many real estate investors, one property just isn’t enough. Once they’ve tasted the success of making money in real estate with an investment property, they want to keep the cash coming! This leads many wondering how to buy a second home for rental. If you’re one of those interested in real estate investing for beginners or for pros when buying a second property, you’ve come to the right place! We here at Mashvisor will tell you how to buy a second home, where to buy a vacation home, and everything else about real estate investing. Once you’re done reading this informative blog, click here to learn more about all aspects of real estate investing!
What is a Second Home for Rental?
A ‘second home for rental’ might sound like an oxymoron, but it really isn’t. It’s not a second home and it’s not a rental, it’s a mix of both. Essentially, it is a vacation home for rent, which is one of the best real estate investments for making money in real estate. By proper definition, a second home for real estate investing is a property that is rented out during the taxable year but is occupied for more than 14 days or 10% of the number of days in which the property is rented.
We’ll get into how to stay smart when buying a vacation home in a minute, but if you’re planning on buying a vacation home for rent in Florida, which is a hotspot for vacation home real estate investing, check out this blog: “The 7 Best Places to Buy a Vacation Home in Florida”.
How to Buy a Second Home for Rental: Scour the Market for Ideal Locations
What’s the most important thing when buying a vacation home for rent? Location, location, location. This is true for any type of real estate investing but is especially significant when buying a vacation home.
The best real estate investments perfectly match their niche with location. Single-family homes are best in suburbs, and apartment complexes are most prominent in cities. You must do the same when buying a vacation home for rent. Vacation homes are best suited for tourist destinations, such as near beaches and natural park locations. Depending on what type of vacation home you want, settle for a specific location and real estate market. Once you’ve narrowed done where to buy a vacation home, begin searching for a property.
Your best source of searching for a vacation home is Mashvisor’s investment property calculator. The calculator breaks down different cities, neighborhoods, and properties all over the US in a matter of minutes. Want to know where to buy a vacation home according to the calculator? Read these two blogs: “The 20 Best Places to Buy a Vacation Home in the Beginning of 2018: Part 1” and “The 20 Best Places to Buy a Vacation Home in the Beginning of 2018: Part 2”!
How to Buy a Second Home for Rental: Breaking Down Your Finances
The second biggest concern when wondering how to buy a second home for rental is finances. Financing requirements of second homes are often more strenuous than those of first properties, so much consideration is needed. Before you sign off that mortgage when buying a vacation home, keep these financial requirements in mind.
Down Payments and Interest Rates
The typical down payment when buying an investment property is 20%. Buying a vacation home for rent, however, typically requires a higher down payment. Interest rates on mortgages for second homes are higher, too.
Debt-to-Income Ratio and Credit Score
Credit scores and debt-to-income ratios are major requirements when trying to secure a mortgage for properties. Like down payments and interest rates, these prerequisites are raised to a higher standard when buying a vacation home for rent.
The typical credit score required for a first investment property is around 620, although investors with lower scores can still obtain mortgages through FHA loans. When buying a vacation home, however, investors typically need a credit score of 720 at the least. There are no FHA loans that cover vacation homes.
The standard debt-to-income ratio for a first property is between 30-35%. The ratio increases to 41% when purchasing a second home.
How to Buy a Second Home for Rental: Considering Financing Options
Once you’ve determined where to buy a vacation home and how your finances add up, consider your financing options. There are many financing methods available for all types of real estate investing. Still, the most common two methods when asking “how to buy a second home for rental” are conventional mortgages and remortgage to buy a second home.
Conventional mortgages are the usual go-to for financing the best real estate investments. Mortgages are always the best-advised method for real estate investing for beginners. Conventional mortgages consist of all of the financing requirements that were previously mentioned, including a down payment, interest payments, debt-to-income ratios, and credit scores.
If you are an experienced investor with home equity from an owned property, you aren’t as limited in your financing methods. Instead of taking out a conventional mortgage, you can remortgage to buy a second home. A remortgage to buy a second home uses equity to pay off a new property. This financing option is great for experienced investors, but is not available for real estate investing for beginners, by definition.
How to Buy a Second Home for Rental: Analyze the Property and Expected Costs
The next major step on how to buy a second home for rental is analyzing the property and estimating its costs. The best way, by far, to analyze a property and its costs is to use an investment property calculator. To read more on this topic, check out this blog: “Where can you find a rental property calculator?”!
How to Buy a Second Home for Rental: Conclusion
Making money in real estate through a vacation home is an excellent real estate strategy. Knowing how to buy a second home for rental is very similar to buying a first investment property, except there are more stringent financial requirements set in place. Nonetheless, buying a vacation home for rental is absolutely worth it when the property is financed and rented properly.
Want to start finding a second home for rental? Click here to start your 14-day free trial with Mashvisor!