Every entrepreneur should at some point consider investing in rental property. The good news is that if you’re already a homeowner, you could start your investment without putting in another cent.
Before you get started, take a look at these seven tips for buying a new home while renting out your house.
Repairs and Renovations
Before listing your home for sale or starting the hunt for a new house, you’ll want to do a thorough examination of your house for any repairs or renovations that need to be made.
Major repairs, such as roof replacements, will impact your overall budget. It can also increase the rental price, giving you a higher return.
Consider Landlord Responsibilities
This is an important factor when considering renting your house. Becoming a landlord comes with a unique set of responsibilities. You’ll need to address regular maintenance, collect monthly rent, and handle the legal aspects, such as lease agreements or possible evictions.
Many of these can be addressed by hiring a property management company. Extra costs, such as regular repairs or even landscaping, will more than likely fall onto your shoulders.
Finding the Right Lender
If you intend on buying another house while renting your current home, you may come across issues when finding a lender. As a first-time landlord, lenders need to be able to determine if you are a risk and have the financial stability to maintain two mortgages.
Other types of loans, such as VA loans, require you to make your first property your primary residence for at least a year. Otherwise, you may incur additional interest or be declined altogether.
Investing in rental property will require you to complete a rental appraisal. This is similar to a house appraisal, only they’ll be analyzing the value of the property for rental purposes.
You’ll need to request a Single-Family Comparable Rent Schedule Fannie Mae Form 1007. This appraisal will give you an idea of how much you can charge for monthly rent.
Get Your Financials In Order
For you to be approved for your loan, you’ll need to have all of your financials in order. For one single-family home, you’ll need to have at least 2% of the unpaid balance either in a bank account or an investment account.
Note that this doesn’t include the amount you intend to finance for the new property. This is only for your first mortgage.
Say, for instance, you owe another $200,000 for your current home you intend to rent. The lender will require that you have at least $4,000 in reserves, plus a completed 1007 form so they know how much rent will be coming in monthly.
Learn About the Rental Market
You’ll need to do your research in learning about the market in the area in which the home you intend to rent resides.
First, it’s important to understand how much rent you could obtain each month. Compare similar homes with the same amount of upgrades or lack of which have been made.
You’ll also need to know about the demographics to see the types of individuals or families that will be renting to determine income levels. Certain tax laws per county, city, or state will also need to be followed based upon the rental market in your area.
There may be certain times throughout your rental experience when you end up with a vacancy. You’ll need to create a detailed budget to ensure that you can afford to have your property listed for an extended period before purchasing a house.
While the current rental market is booming, it doesn’t necessarily mean your neighborhood and price point will be encouraging to renters in your area. Having extra funds available for months at a time to pay for two mortgages is essential so you don’t find yourself in financial trouble.
Renting your house while buying another may be a lucrative opportunity for a first-time real estate investor. Aside from initial repairs and renovations, you may not need to put down a substantial amount of money before making passive income.
Start doing your research in your area early on. Compare your home to others in the neighborhood that are currently for rent. Learn about the various landlord and tenant laws for your city. Most importantly, get your finances in order before making any type of additional investment in a second property.