Updated: Jun 16, 2020
Purchasing a second home is a large task to take on however just like many things in life, every risk has it's own rewards!
Is your first house rentable?
The first thing you will need to do is establish if your current home is rentable. To do this, you can ask a local real estate agent or check current rental value on Craigslist. If you have a 1-3 bedroom in good condition in a urban or suburban area you should not have a problem. However, not all homes are good for renting such as those that are very large or in very rural areas.
Can I afford a second property?
If you have the cash to purchase a second property outright than you can of course afford it, however we will be diving into the financing portion of a second house for those who need financing or hope to leverage their property for a higher return on investment (ROI). When purchasing
When trying to finance your second home, your debt to income ratio will evaluated. This is important since just as your first mortgage they calculated all of your debts such as a car loan or student loans in addition to your new mortgage, this will also include the mortgage on the first house as well as the second.
There are two ways to qualify for the second home if you don't have the large income needed to sustain two mortgages. The first way, is to have rental income from the past twelve months that can be proven. The second, is to have a recently signed lease that can be used to offset 75% of the cost of the rental home.
What Tax write off occur with a rental property?
Tax laws are always changing and it is important to talk with your tax attorney about this however there are currently some significant savings. To help reduce your taxes on the rental income, you can deduct any repairs, management fees, mortgage interest and the largest will likely be the depreciation. The home can be depreciated over 27,5 years which allows you to spread the cost of the home out over a long period of time helping with your taxes throughout it's ownership.
should you become a landlord?
Becoming a landlord can be a significant side hustle as you will have to vet tenants, handle maintenance issues, and worst of all deal with possible evictions. The good news however is that if you do proper upfront work and get a good tenant you may be able to live hassle free for years! If you choose that you won't want that responsibility, you may hire a property management company. These companies will find the tenants, handle maintenance issues automatically and lots of other things. These companies aren't free however and generally charge around 8% of the rental income per month.