You may have heard a thing or two (or a million) lately about the historically low interest rates out there for those in line to get a home loan. If you haven’t, let me just tell you that if you’ve given any thought to purchasing your own home, you’re doing yourself a disservice if you don’t get out there now. It’s practically the Black Friday of home buying!
With that said, you may be thinking to yourself, “Yeah, that’s great and all, but I’m already a homeowner. What’s in it for me?” Well, after you look into refinancing your current mortgage rate to get into the best financial position, you should seriously consider the possibility of purchasing a home as rental property.
CNNMoney recently published their list of the “Best Cities to Buy Rental Properties,” with Detroit coming in at number 2 (woohoo!). Essentially, although home prices have fallen over the years, rents have been on the rise, creating the perfect storm for the savvy investor to scoop up inexpensive homes and rent them out for a profit.
Intrigued? If you think you may benefit from a second home as a rental property, consider the following to be sure this investment is the right fit for you.
Can I afford it?
You may be eager to just jump in and purchase homes like you’re playing a heated game of Monopoly, but (unfortunately) in real life, we don’t collect $200 every time we pass “go.” You need to take a hard look at your current home costs (taxes, insurance, repairs) and living expenses, how much you have in savings, and then determine if you’ll be able to keep up with the same ongoing expenses in a second home, even if you are unable to find a renter. With that in mind, financial managers recommend you have a year’s worth of money on hand to plan for rental income or maintenance issues.
Will I qualify for a second home loan?
It makes sense that it would be a tougher road to qualify for a second home mortgage than it was the first time around. Your finances are already going toward your current home and all the expenditures associated with it, so you’ll need to show your wallet can handle it. Lenders also see investment properties as more of a risk, so you can expect a higher interest rate.
How will this affect my taxes?
You can be sure that the rental income you receive needs to be declared on your tax return and will be taxed accordingly. Now don’t get totally bummed out, because there’s a silver lining; you won’t have to pay FICA taxes on your rental income. Also keep in mind that you can deduct certain expenses related to the property, such as mortgage interest and any repairs, but you can’t deduct additions or renovations.
Am I prepared for the responsibility that comes along with being a landlord?
There are definitely some things you don’t want to overlook when considering owning and managing a rental property. Before you attract tenants, you’ll want to read up on your legal obligations and rights and consult a lawyer to draft rental agreements. Also, keep in mind that you’ll be responsible for the maintenance of the property, so you have to be ready to address things such as broken pipes, leaks, and other time-sensitive issues immediately. You may want to consider if you’d be better off finding a rental property management company to handle these details for you.
Okay, I’ve crunched the numbers and I feel ready. Let’s do this! Wait, how do I start?
How exciting! You’ve given serious thought as to whether or not owning a rental home was right for you and decided to go forward. Now you probably can’t wait to move on to the most exciting part of the process – the search for the perfect property. Consider the location when looking. You’ll want to find a place that’s located in a highly populated, safe, and in-demand area to increase your odds of finding a large pool of potential tenants. Once you find that perfect place, you may need to put some more time and money into the property to increase its appeal, and potentially raise the amount you can charge for rent.
Well, there you go. Now you are an informed consumer and can decide for yourself if this investment opportunity is right for you. Have you ever owned a rental property and have more to contribute to the conversation? Please leave your tips and advice in the comments below!
Before you go, here’s the complete list of CNN’s top 10 “Best Cities to Buy Rental Properties”:
- Las Vegas, Nev.
- Detroit, Mich.
- Daytona Beach, Fla.
- Orlando, Fla.
- Warren, Mich.
- Bakersfield, Calif.
- Phoenix, Ariz.
- Atlanta, Ga.
- Reno, Nev.
- Tampa, Fla.