If you’ve spent years working to build equity in your home, it can feel a little strange when the time comes to move on. While living in a new home that better meets your needs is a good thing, it can feel odd selling something that you’ve sacrificed so much to make your own. It turns out, however, that your first home is an opportunity to generate passive income and you don’t have to sell it off to someone else. It could even pay the mortgage on your second. Here is a look how to buy a second home and rent the first along with some pros and cons.
The Pros Of Renting Out Your First Home And Living In Your Second
Many people are ready to buy a second home but want to know if selling their first is the best move, or if they’d be better off renting it out. There are numerous advantages to renting out your first home and buying a second.
Build Your Assets
When you sell your old house and buy another, you don’t increase your total assets. In fact, the transaction costs involved might mean that you have less money than you did before. As the seller, you must pay agent fees, which can be as high as three percent of the value of the property.
Renting out your first property lets you avoid this hit to your net worth while building up your assets at the same time. You can often get a mortgage for as little as 3.5 percent, so as long as your old property is generating more than your interest payments to the bank, you’re building wealth.
Get Tax Advantages
Another perk of renting out your first property is the tax advantage. You can subtract depreciation of your first property from your taxable income, lowering your overall tax bill and freeing up more money to spend and invest. Deductions also include the maintenance costs on the property that you rent out.
Get A Leg Up On Your Real Estate Investment Journey
Making money from real estate investments can be a slow process, but the earlier you start, the better. Converting your first home into an income-generating asset teaches you about the rules of the game and how to make money.
You learn all about setting rents, finding good tenants, and working with agents. Over time, you gain experience in the market, enabling you to find better opportunities in the future.
The Cons Of Renting Out Your First Home
It’s not all good news, though. There are some serious downsides to renting out your first property that might impact your decision.
Tax Time Gets Complicated
As you likely know, most people pay their income taxes through their employer. If, however, you are renting out your first property, you may be entitled to additional deductions. Calculating your total taxable income is, therefore, more complicated, requires more planning (and perhaps even an accountant).
You Have To Act as Property Manager and Landlord
Looking after a property isn’t easy. Not only do you have to deal with tenants coming and going, but you also have to respond to occasional emergencies such as plumbing issues or a leaky roof. Being a landlord can end up taking up a large chunk of your time.
If you want to avoid all the work involved in renting out your first house, you’ll have to pay an agency to manage it on your behalf, and they won’t do it for free.
The Running Costs
While real estate generates additional income, it also requires regular upkeep and maintenance.
Providing this can get expensive and something can hamper your overall returns. Ideally, you want to spend less than one percent of the value of the property per year on keeping everything in good condition to avoid eating into your profit.
How to Buy a Second Home and Rent the First
Look at Your Finances
The first thing you’ll need to do is sort out your finances to ensure that you can afford to take out the mortgage on the second property. Remember, because you’re not selling your first property, you can’t put your equity from that home into the second. Thus, you’ll have to take out a large mortgage on a substantial chunk of the value unless you have lots of cash lying around.
Buying a second property is usually more complicated than buying the first. Income requirements are often more stringent, and you often face higher interest rates because of the perceived risk.
Put Down The Downpayment
The next thing you’ll need to do is put down the down payment.
In most transactions for second homes, you’ll need a downpayment equivalent to around 20 percent of the asking price of the property. You can opt to put down less than this if you want, however, you’ll end up paying higher interest rates and spend longer paying off the loan.
Find A Second Property That Meets Your Needs
Finding your first property was challenging enough, but finding a second property can be even more so. You want to find somewhere that is essentially just as good as your first property and offers quality schools, a good neighborhood and has a low crime rate. After all, you want to be able to stay long enough to start making money on your first house.
Decide How You’ll Manage Your First Property
Finally, you’ll want to decide how you’re going to manage your new property. We touched on this earlier, but you can either do all the legwork yourself or pay an agency to do it for you. In the former case, you’ll pay with your time; and in the latter, with your money.
Get the Right Licenses
Make sure you have all of the federal and state-required licenses for renting your home. It isn’t as simple as letting someone just stay in there and throw you cash every month.
Once you have everything squared away, the process of buying a second property is similar to the process of buying your first. If you can pull it off, it can be an excellent way to earn additional passive income from your assets.
If you are looking to purchase a second home in the Kansas City area, contact the Cami Jones & Company team by calling 913-521-8809. We will help you find the perfect place at the perfect price.