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How to Rent Your House and Buy Another One

Get 6 tips to buy a new home and keep the old one as a rental property.

By
Laura Adams, MBA
May 23, 2012
Episode #268

Page 1 of 3

How to Rent Your House and Buy Another One

A reader named Erin H. asks:

“I live in a townhome and want to buy a bigger house in a better neighborhood. But I’d like to keep my townhome as a rental property. What are the rules for getting a new mortgage when you rent out your house and buy another one?”

Becoming a landlord certainly isn’t for everyone. However, having tenants who pay enough rent to cover your mortgage and give you extra monthly income can be a fantastic investment—for now and when you retire.

Keeping your old home as an investment property is one of the easiest ways to become a landlord. In fact, that’s how I got my start as a real estate investor.  All you have to do is move out and stick a “For Rent” sign in the yard.

Getting a mortgage for a second home is just like the process you went through to buy your first home. Approval depends on your income, savings, down payment, credit rating, and debt-to-income ratios.

Buying a second home that you plan to live in doesn’t require you to pay a higher down payment or have a certain amount of equity in your existing home; you simply have to prove that you can afford 2 mortgages.

What’s Required to Buy a Rental Property

Not only is it easier to rent your house and buy another one, but it’s less expensive than getting a loan for an investment property. A mortgage for a non-owner occupied property requires a larger down payment (like 20% or 30%) and always comes with a higher interest rate than a loan for a house that you plan to live in.

6 Tips to Turn Your Home Into a Rental

Before you start shopping for a second home here are 6 important tips to make sure you’re ready to own a rental property:

Tip #1: Review Your Existing Mortgage

Some mortgages don’t allow you to convert your residence into an investment property without paying a penalty or refinancing into a more expensive, non-owner occupied loan. Or they may require a one-year waiting period before you can rent out the property.

Once you switch your insurance from a homeowner’s policy to a landlord or commercial policy, the lender will definitely know that you’re not living there anymore. So read your mortgage or call the lender to make sure that you understand what’s allowed.

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