How to Rent Your House and Buy Another One
Get 6 tips to buy a new home and keep the old one as a rental property.
A reader named Erin H. asks:
“I live in a townhome and want to buy a bigger house in a better neighborhood. But I’d like to keep my townhome as a rental property. What are the rules for getting a new mortgage when you rent out your house and buy another one?”
Buy Now
Becoming a landlord certainly isn’t for everyone. However, having tenants who pay enough rent to cover your mortgage and give you extra monthly income can be a fantastic investment—for now and when you retire.
Keeping your old home as an investment property is one of the easiest ways to become a landlord. In fact, that’s how I got my start as a real estate investor. All you have to do is move out and stick a “For Rent” sign in the yard.
Getting a mortgage for a second home is just like the process you went through to buy your first home. Approval depends on your income, savings, down payment, credit rating, and debt-to-income ratios.
Buying a second home that you plan to live in doesn’t require you to pay a higher down payment or have a certain amount of equity in your existing home; you simply have to prove that you can afford 2 mortgages.
What’s Required to Buy a Rental Property
Not only is it easier to rent your house and buy another one, but it’s less expensive than getting a loan for an investment property. A mortgage for a non-owner occupied property requires a larger down payment (like 20% or 30%) and always comes with a higher interest rate than a loan for a house that you plan to live in.
6 Tips to Turn Your Home Into a Rental
Before you start shopping for a second home here are 6 important tips to make sure you’re ready to own a rental property:
Tip #1: Review Your Existing Mortgage
Some mortgages don’t allow you to convert your residence into an investment property without paying a penalty or refinancing into a more expensive, non-owner occupied loan. Or they may require a one-year waiting period before you can rent out the property.
Once you switch your insurance from a homeowner’s policy to a landlord or commercial policy, the lender will definitely know that you’re not living there anymore. So read your mortgage or call the lender to make sure that you understand what’s allowed.
Tip #2: Research the Rent
Never assume you know how much rent you can get for your home. In some areas, the going rent is less than what it costs to own a home. So consult with several local property managers about actual rents that investors are getting for homes similar to yours.
If there are no comparable rental properties close to your home, try advertising your property for rent at the price you’d like to receive and see if anyone is interested.
Tip #3: Estimate the Ownership Cost
Once you know how much rent you could charge for your home, subtract your carrying costs. These include all the expenses of owning and managing an investment property—not just your mortgage payment.
Get an estimate on a landlord’s insurance policy because bad tenants can destroy your home and be a huge liability if something goes wrong. Add up the cost of this insurance and your property taxes—plus, you may need to cover the cost of homeowner’s association dues, yard work, pest control, and utilities.
Use an Investment Property Calculator to make sure owning a rental would be profitable for you.
Tip #4: Factor in Vacancies
In addition to a rental property’s known expenses, always factor in the unknown by using a 10% annual vacancy rate. For example, if you charge rent of $1,000 a month or $12,000 a year, have at least $1,200 ($12,000 x 10%) set aside. That’s the minimum cash cushion you should keep on hand to be prepared for unexpected repairs or a tenant who disappears in the middle of the night.
Tip #5: Consider Using a Property Manager
I always recommend that you budget enough to hire an experienced property manager. They charge about 10% to 15% of the rent, but can pay for themselves by getting you the best rental price and saving you time. A good property manager will screen tenants, execute leases, get estimates for repairs, and take annoying late-night emergency maintenance calls.
If you decide to manage a rental property yourself, you’ll need to understand landlord and tenant laws for the state where you live.
Tip #6: Get a Mortgage Preapproval
It’s never too early to meet with a lender for a free consultation about whether you can afford to buy a new home and keep the old one as a rental. Always get a mortgage preapproval before you start shopping for your first or second home.
Lenders can give you a preapproval letter after they review and verify your financial information. It shows the maximum amount you can borrow for a certain period of time. However, remember that you shouldn’t borrow the maximum amount if it would be a stretch for your budget and overall financial goals.
Not only does a mortgage preapproval help you shop for homes in the right price range, but it’s an excellent negotiating tool. A preapproved buyer is more attractive to a seller who might be willing to take a lower offer than a higher one that’s contingent upon financing.
Once you confirm that you can turn your home into a rental, have a realistic expectation of its annual cost, and get preapproval to buy a second home, you’re on your way to becoming a real estate investor.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.
