Rent Out Your House and Buy Another: If you want to buy another home, renting out your current home might be the best option. Renting out your original home could provide the extra cash flow that your budget has been craving. So, if you’re looking for a way to rent out your home while purchasing another, you’ve come to the right place.
Let’s take a look at how you can rent out your home. Also, think about whether this option is a good fit for your finances and lifestyle
Is it a good idea to rent out your home?
Is it a good idea to Rent Out Your House and Buy Another? Determine the tax implications, your eligibility, and even your emotional attachment to your home.
“If you’ve never done it before, becoming a landlord can be intimidating,” says Phil Peterson, managing broker at RE/MAX in Schaumburg, Illinois. “There are benefits and drawbacks to renting out your home. I’ve been there before. But I wasn’t aware of all those ups and downs at the time.”
According to Peterson, the situation is highly dependent on the price of your home and the amount you paid for it.
How can I afford two houses?
You might be wondering how on earth you can afford two homes before we go any further. You’ll need to assess your financial situation to see if you can afford another home.
Options for a second home down payment
There are a few ways to come up with the money for a down payment on a second home. To begin with, you can always use your savings to buy a second home. However, just because you don’t have a down payment in the bank doesn’t rule out the possibility of purchasing a second home.
A cash-out refinance or a Home Equity Loan or HELOC on your existing home is another option for covering the down payment on your new home. This is a viable option, but keep in mind that it will reduce your current home’s equity. You’ll also be responsible for a second monthly mortgage payment if your current home is still mortgaged.
Loan types for a second home
If you have paid the down payment, the next step is to get money.
Conventional loans can be a good choice. To buy a new home, you’ll need to meet some financial requirements, like having good credit and enough money to pay for it.
If you want to buy a second home, you can get a government-backed loan to do so. Most of these loans require that the financed home be your main home, so you’ll need to plan to move to the second home and show that you have a good reason for leaving your current home.
Tips on how to rent out your house.
Are you ready to turn your house into a rental? Here are some pointers to get you started.
Think about your emotional attachment.
According to Peterson, another factor that many people overlook when renting out their old home is the emotional attachment they have to it.
“This was your home.” Your kids grew up there. Your memories are still present. “All of a sudden, you have these really nice tenants who leave in a few years,” he explains.
When you go inside to look at it, you notice that the nice tenants did not take care of the house as well as you did. The carpets are stained, and the wall is scratched.
“It’s very difficult to overcome that emotional attachment to that particular house.” But if you just buy an investment property and never live in it, it’s just a numbers game — an income-producing building,” Peterson says.
Examine the fine print on your mortgage.
Many lenders, but not all, will allow you to rent out your home while you still owe money on your mortgage.
Take the time to read the fine print in your mortgage contract. If you have any questions, contact your mortgage lender to find out what the rules are. You don’t want to break the terms of your mortgage. If you do, you may face legal ramifications.
If your current lender does not allow it, you may be able to refinance the loan with a rental-friendly lender.
Understand the lending guidelines when Rent Out Your House and Buy Another.
Lenders will impose strict guidelines on homeowners who convert their primary residence into a rental property. They want to know that you can manage two homes, especially if you have no landlord experience.
First, you should determine whether you are eligible for a new mortgage on top of your existing debt, without the assistance of rental income. If this is the case, you eliminate the need for additional paperwork that verifies future rent on your home.
But suppose you need that income to qualify for a new home.
You must submit Fannie Mae Form 1007, a Single-Family Comparable Rent Schedule. It’s similar to an appraisal, but for rental income rather than home value.
This form is filled out by a licensed appraiser and can be obtained from your lender. The document compares your home to similar rental properties in your neighborhood. It calculates how much rent you could earn per month.
Aside from being a loan requirement, the 1007 can help you figure out how much rent you can charge.
Even with this form, you must demonstrate that you have sufficient financial reserves to make the payment on the vacated home if you are unable to rent it. The amount of money you need in savings, retirement, and investment accounts is determined by the mortgage on the home you’re leaving and the number of financed properties you own.
You will need, in the bank or investment account:
- 1-4 financed properties: 2% of the unpaid balance of all mortgages
- 5-6 financed properties: 4% of the unpaid balance of all mortgages
- 7-10 financed properties: 6% of the unpaid balance of all mortgages
Keep in mind that the above-mentioned reserve amount is not required for the property you’re purchasing, nor does the new property count as one of the financed properties.
According to this definition, most buyers who are renting out their home in order to purchase another will have only one financed property.
For example, suppose you are currently living in a house that you intend to rent out. The property is mortgaged for $200,000 in total.
The lender will require you to have $4,000 in “reserves” available. In addition, your lender will provide Form 1007 to calculate the estimated rent.
Again, if you don’t need the rental income from your current home to qualify for the new loan, you can skip all of these requirements.
Speak with your homeowners insurance provider.
If you decide to rent out your home, you’ll most likely need to increase the coverage on your homeowners insurance policy. This is due to the fact that most standard homeowners insurance policies do not cover rental-related issues.
The Benefits and Drawbacks of Renting Out Your Home
Every financial decision has both benefits and drawbacks. Here are a few things to consider when learning how to rent out your house and buy another.
Let’s start with the pros:
- Generate income
- Build equity through renter’s payments
- Increase your assets
- Explore real estate investing
Now for the drawbacks:
- Complex tax implications
- Responsibility of a landlord
You must weigh these factors for yourself in order to determine which path is best for you.
How to Rent Your Home and Buy Another
Rent Out Your House and Buy Another can be a profitable move if you are up for the challenge. Here are some pointers to get you started.
Understand the rental market in your area.
If you’re thinking about renting, buying a second home, and renting your current one, Peterson recommends speaking with an expert, such as a local realtor. That person would know whether the rental market is healthy, how much you could potentially earn per month, and what it takes to be a landlord. You can also find out about all the new tax laws that may affect you and what your property taxes will be by contacting your accountant before entering the world of landlording.
Make a calculation.
Take the time to run the numbers if you want to make money from your rental. Consider the various rental rates that you might be able to obtain. Check to see if that price range will cover the property’s expenses.
What are the benefits of owning a rental property as an investment?
One of the benefits of owning an investment property is that you can deduct all improvements and maintenance costs. When you sell it, however, as the value rises, you must pay capital gains on the entire profit. It can be a significant outlay, especially if you purchased a home at a time when prices were rising rapidly.”
Let’s say you paid $100,000 for your current home, and it is now worth $200,000. You choose to rent it for a period of time. You’ve had enough of being a landlord and have decided to sell it.
“The $100,000 that has grown in value in your home is now taxable income. However, if you had sold the house while still living in it, the $100,000 would have been tax-free. “That’s a significant difference,” he explains.
On the other hand, if you bought your house for $200,000 at the top of the market and it’s still worth $200,000, you won’t have to worry about capital gains. Then, when you buy a second home, it might be a good idea to keep it as an investment, according to Peterson.
Is it necessary to hire a property manager?
Laura Adams, a California personal finance expert and author of Money Girl’s Smart Moves to Grow Rich, has owned numerous rental properties over the years. She hired a property manager when things became too much.
“They got me higher rents than I expected, and they did a fantastic job of finding good tenants,” she says.
However, if you want to try renting your old house, finding the right tenants can take a long time. You must check references and credit scores, show the home several times, negotiate a lease agreement, and then decide whether or not you can live with these people in your home. This is something that property management can assist with.
“The majority of people who rent their old homes find it profitable. That asset is being paid off by someone. “Eventually, that asset will be mortgage-free, and you’ll be able to sell it or use the proceeds to fund retirement or a new home,” she says.
But, she says, knowing realistically what you can get out of a property in a rental situation is crucial information to have before making a decision.
“It won’t work with your plan if you think you can get $1,000 but it’s only worth $750.” If there are any rental properties available, look them up online and compare them to yours. “That’s a great place to start,” Adams says. “If you can make a profit or just make a little more money than your mortgage, that’s usually a good idea.”
Is being a landlord financially feasible for you?
Another crucial consideration is whether you can afford two mortgage payments.
“If you decide to turn your old house into a rental, you must accept the risk that a renter may abandon you. “On that property, you could go months without any rental income,” she says. “It’s ideal to have a savings or reserve fund set aside for that rental property.”
What if a major repair is required, such as the furnace breaking down?
“You don’t have the luxury of waiting to fix these expenses if they arise.” You should have a line of credit or savings set aside in case of an emergency. “Being a landlord is very risky if you don’t have any savings,” she says.
FAQs on how to rent out your home and buy another
Is it possible to rent out your home and obtain a new mortgage to purchase a new home?
Yes, you can rent out your current home while getting a new mortgage to buy a new home. To be approved for the new loan, you must meet the financial requirements of a mortgage lender.
To buy a second home, how much equity do you need?
It is possible to use some of the equity in your first home to purchase a second home. However, most lenders will only lend up to 85 percent of the home’s current value to borrowers with good credit.
Let’s pretend that your house is worth $100,000. In this case, you’d be able to withdraw up to $85,000 from your home’s equity. If you still owe money on your mortgage, you’ll have to deduct that amount from the $85,000. If you still owe $15,000 on your mortgage, you’ll be limited to a loan of $70,000.
Can I use my home as a down payment on a new home?
No, you can only use the home you’re buying as collateral for a loan.
You can, however, take out a home equity loan to use the equity you’ve built in your first home to help pay for the down payment on your second.
Keep in mind that defaulting on a home equity loan could result in the loss of your primary residence.
Is it possible to rent your house if you have a mortgage?
You may or may not be able to rent out your house if you still owe money on it. Your mortgage lender has the final say. Before renting out your home, you should read the fine print of your mortgage agreement or speak with your mortgage lender.
Do you have to live in your house for a certain amount of time before you can rent it out?
Most lenders will require you to live in a home with owner-occupied financing for at least 12 months as a rule of thumb. Life, on the other hand, can change quickly. As a result, you might find yourself with a valid reason to rent your home sooner rather than later.
However, you’ll need to speak with your mortgage lender to find out when you’ll be able to turn your house into a rental.
Is it possible for me to live in my rental property?
You may be able to live in your investment property in some cases. As an example, suppose you own a property with two to four units. You can live in one unit while renting out the others. You can also live in an investment property without having to share it with other people. However, you should keep in mind that the costs of the property will no longer be tax deductible.
Is landholding worth it?
Being a landlord can pay off handsomely. But you’ll need to crunch the numbers to find out how much you can expect to earn.
You may decide that the time commitment is too great. It’s fine! If you can’t afford a property manager, consider another option.
So, should you rent or sell your house?
How to rent your house and buy another is now up to you and your finances.
In some cases, the financial gain is obvious. In some cases, you may choose to sell your home rather than deal with the hassle of renting it.
If you decide to move on, consider our favorite mortgage lenders for a smooth transition.
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