This article was originally published by Anna Richter in Bluefire Mortgage
Graduating from a home is inevitable, and when it comes to wealth building, it’s hard to beat owning real estate. That’s why one smart strategy to building a real estate portfolio is to hold onto the first “starter” home upon buying a second home and rent it out. Not only is it a great way to generate new income, but there are also plenty of other advantages.
Why Rent Out vs. Sell
Yes, it is currently a seller’s market. This means buyers have been bidding well over list prices in some cases, so selling may be very tempting. However, rentals are also in high demand which makes another continuous income stream quite achievable. If the home is in good condition and in a prime location, the amount charged in monthly rent could cover the mortgage payment as well as homeowner expenses over time. For example, if updates are on the to-do list, these could be planned for with enough monthly earnings.
In addition, there are write-offs available for rental property owners, such as depreciation. In California, all ordinary and necessary expenses paid or incurred during the tax year in maintaining the rental property are allowed as a deduction.
New Mortgage Preparations
If the first home still has a mortgage tied to it, the homeowner will now be juggling an additional mortgage if they are also looking to finance their new home. It may be beneficial to speak with a mortgage loan originator first to ensure that the financial expectations are correct and that the borrower has the ability to qualify and carry both mortgages.
Assess Feasibility and Risk Factor
Upon deciding whether or not to rent, it’s crucial to check the first home’s current mortgage loan agreement to see whether it can be legally rented out. Some loan agreements require a minimum occupancy time before renting is allowed.
It’s also necessary to consider whether the tenants’ rent payment alongside the homeowner’s standard income will cover the financial needs of both properties, and whether two mortgage payments are attainable if a tenant unexpectedly moves out or doesn’t pay rent on time. Vacancies happen, so there should be a cushion of financial reserves to fall back on in the event of an emergency.
The down payment and closing costs of the new mortgage are also important savings factors to consider. A preapproval through a lender before house hunting will spell out an exact price range to search within the parameters of, while also providing a negotiating tool.
If the second home requires a move across the country, and there is room in the budget, it might be useful to hire a property manager. This way, the day to day issues will be handled accordingly.
If you are considering whether or not to rent out your first home and need some assistance, please reach out to Bluefire Mortgage Group at (760) 930-0569 with any questions you may have. We can walk you through the process, and get you pre-approved before you start the search for your new residence.