Are you a homeowner thinking of buying a second home to rent out? Investing in rental property is a great way to make money in real estate. However, buying a second home for investment is a little different from buying your primary residence. It is often a big financial decision that can be intimidating to some. Many beginner investors looking to buy a second home for investment find themselves with a lot of questions. How does buying a second home work? Is buying a second home a good investment? (Yes, it can be!) Well, there are a number of factors you have to take into account before you invest in another property. If you are wondering how to buy a second home to rent out, this blog is for you. Here are the steps to follow when buying a second home to rent out:
1. Determine Whether You Can Afford a Second Home Mortgage
Financing requirements of second rental homes are typically more strenuous than those of first homes. You shouldn’t rush into buying a second home before ensuring that you can actually afford it. You need to keep your debt-to-income ratio and credit score in mind before investing. They will determine if you qualify for a second home mortgage and the interest rates you get. Second home mortgage rates are typically slightly higher than the first.
To get approved for a second home mortgage, you need to have sufficient income. You will need to meet debt-to-income ratio guidelines. If your primary residence currently has a mortgage, your income should be enough to cover both mortgage payments while maintaining a debt-to-income ratio below 41%. Otherwise, make sure you first work on your DTI ratio by reducing your total monthly debt payments, increasing your income, or both. Moving forward with two mortgages can strain you. Moreover, you need to have a credit score of at least 620. If it’s lower than that, try to improve it first.
You should also make sure you have enough cash reserves for a down payment and unexpected expenses. You will often need a down payment of at least 20% of the purchase price. Consider all factors and make sure your finances are in order before applying for a second home mortgage.
2. Explore Other Investment Property Financing Options
The next step to consider when thinking of how to buy a second home is finding a financing option that suits you. There are many financing methods you can use when buying a second home. However, conventional mortgages are the most common. For this financing option, you will need to meet the requirements we previously mentioned, including credit scores, debt-to-income ratio, and down payment. However, not everyone can qualify for a conventional mortgage. If this is you, you could consider buying a second home using the equity in your primary home. If you have built enough equity in your first home, you can refinance to buy a second home.
If you can’t raise a down payment, you can still find ways of buying a second home with no money down. For instance, you could partner with another real estate investor or borrow from family and friends.
3. Choose Your Real Estate Investment Strategy and Investment Property Type
As you continue with your plan on how to buy a second home to rent out, you will have to decide the rental strategy and the rental property type that is best for you. Are you interested in long-term rentals or short-term rentals? There are advantages to both. If you decide to go for long-term rentals, will it be a multi-family home or a single-family home? You should choose an investment strategy and property type that are in line with your real estate investment goals.
4. Find an Ideal Investment Location
Finding a profitable location is one of the most important tips for buying a second home for rent. The location of your home will greatly influence your occupancy rate and the potential return on investment. Keep in mind that location is permanent. Therefore, make sure you choose carefully. The location of your second home should be ideal for your preferred rental strategy. For instance, if you are looking to buy a second home to rent out on Airbnb, you should consider tourist destinations. You need to consider factors like the local economy, infrastructure, amenities, property taxes, and other regulations. You can quickly and easily analyze neighborhoods in any city in the US using Mashvisor’s Real Estate Heatmap Tool.
5. Find and Analyze Rental Property
Buying a second home for rental is different from buying a full-time residence. Once you’ve found a profitable neighborhood to buy your second home, you can begin searching for a house for rent. You can find investment properties that meet your criteria in your neighborhood of choice using Mashvisor’s Property Finder.
The next crucial step on how to buy a second home to rent out is analyzing the investment property and estimating the return on investment. The best way to do your investment property analysis is to use Mashvisor’s Investment Property Calculator.
6. Close the Deal
The final step will be to seal the deal and prepare to rent out your second home. Deal closing usually involves a lot of details and paperwork. Therefore, hiring a real estate attorney to review all the necessary forms, contracts, and other legal documents would be a smart move. Don’t forget to do a title search to ensure there are no liens against the home you want to buy. After signing all the necessary paperwork and paying closing costs, you will become the new owner of the investment property.
7. Be Prepared to Be a Landlord
Owning two homes can be a headache. It is going to take a lot of your time, money, and energy. You will need to look after the maintenance of the home you’re renting out, keep up-to-date with rental laws, screen tenants, collect rent, deal with delinquent renters, etc. If you are buying a second home in another state, management becomes even more difficult. If managing your rental properties seems like a daunting task, you should consider hiring professional property management. Just be aware that this will eat into your profits.
The Bottom Line
Buying a second home for investment can be a lucrative idea but risky if you’re not prepared. There are several things you need to take into account for you to make a wise decision. If you are one of those who want to know how to buy a second home to rent out, following these tips will increase your chances of success. Also, be sure to use Mashvisor’s real estate investment tools in your analysis.
If you want to learn more about real estate investments, check out our blog.