Buying a home is usually the biggest investment that most people will ever make. It means that you will stop paying rent to a landlord and start to pay yourself by building equity of your own. Some people may also consider buying a second home for investment. After all, many real estate investors usually think about investing in real estate after purchasing a second home or even the third one. However, many beginner real estate investors still have some questions unanswered. Can you rent out a second home? Is buying a second home a good investment?
Although it partially depends on your personal preferences and long-term goals, there are things you need to consider before renting out a second home. Regardless of whether you lived in your first home or rented it out, there are certain risks of real estate investing that come with this strategy. So, how do you know whether it’s a good idea? Here are four important things you will need to beware of before you decide to rent out a second home.
1. Can You Afford a Second Home Mortgage?
Before renting out a second home, you will need to run the numbers to ensure that you are able to afford a second mortgage. By this time, you should have paid off your initial mortgage or at least have reduced it by a sizable amount. However, as you move forward with a second mortgage, there are a few new things to keep in mind.
Before the Great Recession that led to the housing crisis, leveraging the purchase of a first home to finance a second home was easier. Nowadays, lenders have become more conservative when it comes to issuing loans for second homes. When purchasing a second home to rent out, there will be more difficult standards for getting a mortgage than with your first home. A second home mortgage rate will often be a little higher than the first mortgage interest rate. The bank will need to ensure that you will be able to comfortably cover both the second and first home mortgages with some money to spare. The lenders will also look at your debt-to-income ratio, financial history among other things for your loan to be considered.
2. Do You Have Enough Cash Available for Down Payment?
Apart from the mortgage rate, you should ensure that you will be able to raise the down payment for the second mortgage. A real estate investment property usually requires a huge down payment and for a second mortgage, it is often more- usually no less than 20%. Raising the down payment is not usually easy even for the first home purchase. So if you decide on purchasing a second home to rent out, you should ensure that you have enough cash available for a down payment. Contact an experienced lender for advice on how much down payment is required for your second home investment and start saving as soon as you can.
Related: Why You Shouldn’t Put Less Than 20% Down Payment
3. Maintenance Costs Will Be More
Another thing that you will need to beware of before renting out a second home is the maintenance costs. When renting out a second home, you will now be responsible for the maintenance of an extra property. Compared to your initial home which you are living in, the rental property will require a lot more maintenance. When renting out a house, it is inevitable that unexpected repairs will come up. As tenants stay in your house, you will often need to repair and replace appliances.
Maintaining even just a single rental property can be hectic. You must be able and willing to repair and maintain your rental properties. You will need to set aside some money to cover your maintenance costs. How much money you will need to set aside will depend on the investment property, its age, and the tenants. Ensuring that you can pay for the necessary maintenance costs when renting out a second home is important if you want to avoid financial distress. If you think you are up for all the potential maintenance work and costs, then thinking about renting out a second home will start to look like an attainable goal.
Related: Hidden Costs of Owning Rental Property and How to Mitigate Them
4. Location Is Key
The investment location is the key driving factor in real estate and will influence your future earning potential. If you choose poorly, it is impossible to move the rental property to a better location. Before renting out a second home, you will need to choose a location that is in line with your real estate investment strategy. Ensure you consider everything about your chosen location. For instance, if your goal is to buy a vacation home, a location with tourist attractions may be ideal.
When you are considering renting out a second home, you will also need to decide if you want the second home to be near where you live or out of town. Do you want to manage it yourself or will you hire professional property management? If the rental property is near your area of residence, managing it yourself would be easier.
Finally, the location must be a profitable one. You will have to analyze it for its median listing price, average rental income, and return on investment. You can do this with Mashvisor right now! Analyze neighborhoods in any city of your choice to ensure you find a profitable place for your future rental property.
Related: How to Choose the Right Location for Rental Properties
The Bottom Line
Purchasing a second home to rent out can be a major financial decision. While there are financial benefits to renting out a second home, there are risks of real estate investing that can hinder your success. The above are some of the main things you need to beware of before renting out a second home. Of course, there are also other things like landlord-tenant laws, insurance, and tax implications that you should consider.
With the right real estate education, financial planning, and tools, renting out a second home can help you begin the journey of achieving financial freedom. Ensure you learn the process of becoming a landlord and how to rent out a house. Mashvisor is a good platform to learn more about real estate investing. You can also use Mashvisor’s real estate analysis tools when searching for a second home to rent out.
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