4 Steps: Buy a Second Home & Rent the First

  • E 3 Mortgage Corp
June 15, 2022

You found your dream home, but before buying it, you need to put your current house on the market. Not so fast. There are several long-term, financially-rewarding benefits to buying a second home and renting the first.

You may hold a mortgage on your home. If so, why not let a renter pay off your mortgage for you while earning extra money?

Say your home is worth $250K, and your mortgage is $900/month. Yet, you can rent your single-family home for $2,500. That’s a $1,600 profit. Even when you apply the 50 percent rule—which considers repair costs, insurance, and HOA fees—you’re still earning $350 monthly.

Once your home is paid off, you gain roughly $2,500 in passive income every month.

If that doesn’t convince you, consider research from the Federal Reserve showing that the median sales price of a house sold increased 81 percent in the last decade. If that trend continues, your home may appreciate to $450K in value in the next ten years, offering a significant return on investment.

If you’re interested in earning passive income and building long-term wealth, here’s how to buy a second home and rent the first.

1. Review your finances

Two homes. Two mortgages. While a renter will hypothetically pay your first mortgage, you’re still on the hook every month, regardless of whether the renter is in good standing. So before you leap, pay off high-interest debts, review your monthly expenses and income, and create a financial budget.

2. Drum up cash for another down payment

You were planning on using the proceeds from the sale of your first home for the downpayment on your dream home. No need. Instead, explore a home equity loan or home equity line of credit. Doing this allows you to take equity out of your first home and use it to fund a second purchase.

3. Determine if your first home is rentable

The rental market is hot, but depending on location and condition, a two-bedroom, single-family home is unlikely to rent for the same amount as a five-bedroom, newly-renovated home.

To estimate your first home’s income-generating potential, plug your information into the free Roofstock Cloudhouse Rental Calculator. If you want to buy a second home and rent the first, this will help determine your rental’s market worth.

4. Manage your rental

You’re officially a landlord. Now you have to manage your tenants. Many individuals who buy a second home and rent the first prefer to stay hands-on and save money by self-managing their rentals. This is certainly an option—and it may save you 10-15 percent every month.

But those savings come at a cost. You are responsible for marketing the home, screening tenants, collecting rent, and maintaining the property. Typically, a property management company will step in for a 10-15 percent monthly fee, which they deduct from your monthly rent profit.

E 3: For all of your Mortgage Needs

E 3 Mortgage Corp is a team of qualified, professional loan experts dedicated to people like you—whether you’re considering buying a home or already own one and want to refinance. We have over 25 years of real estate and mortgage experience in Florida and New York. With many happy customers along the way, we’re a company you can trust.