The Pros And Cons Of Buying A Second Home (And Renting It Out)

If you want to join this rising trend, and buying a second home to rent out this year sounds like a good idea, there are a couple of questions you need to ask yourself before you start shopping. The first question to ask is “How much money do I need to save up?” There are several tried and tested methods for purchasing a second property.

The first thing to keep in mind is the financial factors. This would be similar to what you did the first time buying a home. 

All homeowners need to save money for the home mortgage, HOA fees, closing costs and much more. To be on the safe side and meet your financial goals, save a substantial amount for the down payment, with a budget of 20-30% of the assessed value. Don't give up if you don't have the cash on hand to make such a down payment. Start saving today so you can afford the home you are hoping to buy! 

Here are the steps to take to get you closer to buying another property.

Receive A Pre-Approval

Receiving a pre-approval for a mortgage allows you to know how much money you can borrow. It also calculates an estimate of your monthly mortgage payment to assist in sticking to a budget. You can compare different mortgage loans once you've been pre-approved. It’s best to finish this stage as soon as possible.

Work With A Credible Real Estate Agent

Having a good real estate agent is important because buying a home is one of the biggest financial commitments people make.

An agent can answer questions like: What type of loan will work best for me? Is buying now a good idea, or should I wait? How much can I really afford? Will it be easy to rent it out?

Choose an agent you trust and who knows the neighborhood well—and be sure to get referrals from friends or colleagues before making a decision.

Visit Multiple Houses

Take the time to visit properties and pay attention to the following when looking for a second home that meets your needs:

Let’s now consider the pros and cons of getting a second home. Understanding these is crucial when making a final decision.

Pros

Starting with the pros, here are the items in favour of buying a second home.

A second house can provide an additional source of passive income, whether you rent it out for a few days a year or as a full-time investment property. Keep in mind, you can also potentially sell the home for a profit if it appreciates dramatically.

You'll be more likely to benefit from itemizing deductions on your tax return if you pay mortgage interest and property taxes on both your permanent residence and your vacation home. Tax advantages for investing in real estate are similar to those for running any other business.

If you are between renters, use the home as a holiday destination! Additionally, if you frequently visit the same location, you may appreciate not having to book a hotel every time you travel. Later on, you can retire there as well. 

For individuals that already know where they would like to retire, owning a second home in that location will provide a head start and make the transfer smoother.

Cons

Let’s now consider the cons involved in the buying of a second home.

There is no such thing as a risk-free investment. Make sure your finances can endure the long-term ownership of a second house, especially if the rental or resale markets deteriorate.

Homeowners will have to bear additional expenses such as property taxes and maintenance costs. Additionally, expect to spend more on insurance than you would for a primary residence.

Homeowners will have to bear additional expenses such as property taxes and maintenance costs. Additionally, expect to spend more on insurance than you would for a primary residence.

Prepare to deal with rules about how many people can stay in a room. Lenders, local regulations, and homeowners' groups may impose restrictions on how you use your property. This includes how often you can rent it out and for how long each rental term lasts.

Homeowners might get tired of vacationing at their second house, but can't afford to leave because of the money they have invested in it. Maintaining a second property may also jeopardize one's capacity to accomplish other financial objectives, such as retirement savings.

Purchasing a second home to rent out is a terrific method to generate a passive income that can be saved for retirement or reinvested in the purchase of more rental properties to extend your landlord portfolio. There are, however, some factors to consider when purchasing a second property for rental income that all investors should bear in mind as they enter the rental real estate market.

Here are the dos and don’t when buying a second home.

What To Do

If you've decided to buy a second home to rent, make sure you:

Let’s look in more detail at each point.

If you are investing your savings in a second home, understand why you are doing so. Is it your intention to rent out the second home? Do you intend to live in the second house while renting out the first?

Furthermore, receiving rental revenue is a bonus for anyone who owns multiple investment properties, but what is the point of earning the extra cash? 

Do you want to put money aside for your golden years? Is the goal to explore the world with a family member after a significant quantity of money has been saved? 

Before you invest, understand what the goal is so you can have a clear focus when looking for the ideal property.

Before investing in real estate, don't forget to complete the appropriate market research. Finding renters is not always easy but certain characteristics, such as simple access to transportation routes, the availability of good schools, closeness to commercial areas, and other factors will attract individuals to the property.

You might buy a second home to rent out, but want to sell it later. This is why it is critical to purchase a home with high resale value. Keep in mind that the location of the house, the neighborhood it is in, and the quality of the house are just some of the aspects that may influence your home's resale value. Invest in a house that will benefit you today as a rental property but also earn you a profit when you resell it later on.

When it comes to owning a rental property, the dos and don'ts involve thinking about not only your immediate needs but also your long-term goals. 

If you plan to relocate once your children have left the nest, why not buy a retirement property now and rent it out instead of looking for a home down the road when homes will be more expensive? Think about the future now, while you still have the health, time, and resources to invest in it, so you can be ready for retirement when the time comes.

What Not To Do

Buying a second home also comes with some don’ts. These include:

Remember that being a landlord is not as easy as it seems. Keep the following points in mind.

Like any other business project where more than one person participates, partnerships have their set of cons too. It is best to have a representative who can help take care of other aspects which you are not good at; this way work gets done smoothly without any hiccups.

Landlords need to keep track of things like rent being received, outstanding dues, fees for late payment and much more. Failure to do so might lead to future problems.

Finding suitable tenants that pay payments on time and don’t damage the property are not always easy to find. Choose a tenant very wisely, and ensure they don’t have poor credit.

Not only is it expensive to buy a property (or two), but the upkeep of a house can add up over time. Renovating your rental property, or answering a late-night call from your tenants letting you know the air conditioning is not working is common. Put some money aside for possible costs that may incur over time for your rental property.