With interest rates historically low, many are deciding to invest in a second rental home

If you buy at the right time, a rental home can provide a steady source of income to pay its own mortgage. In fact, owning a second property can even supplement your savings (as long as the property is continuously rented). Here are some tips, tricks, and things to look out for if you’re thinking about buying a second home and renting it out.

Tax advantages

Investing in a second home may come with substantial advantages compared to other investment options. Expenses such as utilities, maintenance, taxes, and insurance are deductible against your rental property’s income. Additionally, losses from your second home are often deductible against your other sources of income. This is unique compared to other investments, and may make purchasing a second property worth your while.

… and more tax perks

Depreciation, which allows for the wear and tear on your second home, is yet another tax deduction that will support saving money on your bill. Furthermore, if the value of your rental property goes up significantly and you find another property you’d like to invest in, the options are on your side! You can sell the original property and roll the proceeds into the purchase of another rental home without paying capital gains taxes.

Run the numbers before making a decision

Buying a second home as a rental property is a significant financial decision. To be safe, you’ll want to do some serious homework beforehand, to figure out whether buying a particular home is right for you. If you’re already having trouble paying your first mortgage, or other bills and/or debts, taking on a second mortgage might not be the smartest choice. You should consider buying a second home to rent if:

  • You’re already financially stable and can easily pay off your current mortgage and other bills
  • The down payment for your second home does not exceed 30-50 percent of your life savings
  • You have a steady source of income. If you lost your main source of income and you didn’t have a tenant in your second home, you could continue to pay both mortgages and other bills for up to one year

How to find your dream ‘investment’ property

Buying a second home may be an excellent and fitting choice for you! However, you’ll want to make sure that you buy the right home. When looking for a second home as an investment, consider:

  • Location and Value: The best investments are often undervalued homes in great locations. There are often “hidden gems” in neighborhoods that are becoming revitalized and increasing in popularity
  • Cost of Potential Renovations: You’ll want to purchase a home that needs only as many renovations as you can afford. Always expect renovations to take 1.5-2x longer than you think, and remember that you’ll be missing out on possible rent payments during the time of any construction or renovations
  • Maintenance Costs: Calculate potential maintenance costs per year, keeping in mind that larger homes, older homes, and properties with large yards will require more costly maintenance

Make sure you’re ready to be a landlord

It’s important to keep in mind that owning a rental means you’ll be a landlord. You’ll have significant responsibilities when it comes to maintaining your property, as well as dealing with any tenant conflicts. For example, if your rental home’s toilet stops working on a Sunday night, responsibility will most likely fall on you to call (and pay for) a visit from the plumber.

Choose (the right tenants) wisely

Ideally, you’ll choose a tenant or tenants who are responsible, have a steady source of income, and who plan to stay in the home for at least a year. To ensure safety and security, it may be a good idea to check a potential tenant’s credentials, employment history, and credit score.

The opportunities are yours to explore

Buying a second home for rental purposes can be a great investment if you do your homework. If you choose the right home in the market, you can get an amazing return on investment throughout the years. And who knows – you may end up loving your second home so much that you decide to move in!

Looking to purchase property in South Florida? At Tim Singer & Associates, we are more than happy to assist you in finding the perfect second (or first) property for your budget and needs. Contact us today to get started on your real estate journey!