There may come a time when your current home no longer meets your needs. Whether you're a growing family looking to upsize, or a family looking to downsize, or maybe even just looking at a different part of town, your current home no longer has the space or the functionality that you might need. If you've thought about this and maybe you've also thought you know I don't really want to sell my home there is another option.
You can always find a second home and rent out your first. There are several things you might need to know before you take a step in that direction and today's video is going to cover just that. Whether you're new to the channel or returning subscriber, thank you and welcome. My name is Emily.
I'm a local realtor here in St. Johns County, Florida with Heron Real Estate and your local expert to all things St. Johns County. channel we cover all things St. John's County as I mentioned and all things real estate so join us every week for a new video the best place to start when you have decided to take that leap and buy a second home and rent out the first one is you guessed it a mortgage broker or the bank there are different criteria when it comes to qualifying for a mortgage on a second home and while this isn't a vacation home you will still have the financial burden if you will of the first mortgage to account for in your qualifications a lot of times lenders will require you know 20% down there may be programs where you can get away with less but it is typical to see 20% and then they will also want to see a cash reserves in the event you can't rent the house out they will want to see that you are able to make that payment that mortgage payment in addition to your second one your lender may also require the fannie mae form 1007 during this process as a part of your application and lending package you will have to check with your mortgage broker but this form simply takes all of the area it's it's like a single family comparable but for rental income versus an appraisal like you would have for a regular mortgage on your primary residence. This not only allows the lender to see what other rentals are going for in the area, it also gives you a good idea of what you might be able to rent your property for.
Once you know you can qualify for your new mortgage on the second home, talk to your local real estate expert or realtor in the area. We will be able to provide you with comps of homes that are actually for rent or have actually rented recently. So with a combination of that Fannie Mae form and the actual comps in the area, you can get a good idea of what your you can see realistically what your home would rent for what to expect every month on rental income i will also be able to help you find your second home and using the same real estate agent for both transactions is helpful because the process can go a little bit smoother they understand your timelines and they're already involved with kind of the process as a whole the third person i would talk to is your accountant being a landlord and renting out property and earning income are all things that become tax taxable there's lots of rental and real estate tax law out there and you want to make sure that you are well versed and you know what to expect so that you can make the decisions based off of what's best for you and your financial situation once all of that is taken care of you can sit down with your family and weigh the pros and cons of becoming a landlord and renting out your property some of the positives include generating income of course tax breaks like I said there's a whole list of specific tax information related to rental properties you're increasing your asset portfolio and for some of you you may be starting out on your real estate investing career on the flip side becoming a landlord isn't always easy so you will have to deal with complications from that from time to time you got to make sure that you have enough of a savings buffer buffer for those unexpected repair and maintenance.
And as I mentioned, any potential time period where you aren't collecting rent, maybe it's between moves or should you have to evict somebody or maybe the rent, the house isn't renting as quickly as you would like. Other items to note, definitely talk to your current mortgage provider or read your mortgage documents. There might be some fine print in there about a wait period or even a clause stating that you can- cannot rent your property out.
So those are things you're gonna wanna know beforehand. Also make sure you're talking to your insurance provider for your current homeowner's insurance. They will make sure that you have the appropriate coverage because your coverage will change and your rates might change as well.
They too might also have some fine print about renting out your primary or what is now your primary residence and your tax status with the county as well might change. If you're claiming a tax exemption like homestead exemption with your county all of that stuff will change too. All right so we've talked to our mortgage guy or gal. We've talked to our insurance company. we have a great local realtor on our side and on our team we've figured out exactly what second home or new home we can afford and now we're gonna try and figure out what do we do now how do we get someone in my old home who's qualified and who's gonna pay the rent so when you're looking for a tenant you definitely want to keep some things in mind and i would make sure i do All of these things I'm about to list to make sure that you find the best quality tenant as that can make all the difference in the world when you're a landlord.
For this thorough tenant screening, make sure you do a background check on every single adult over the age of 18 living on the property. You want to check that they have a stable job. You want to make sure that any... rental previous rental history is accounted for and i would even call the previous landlords to check to see what kind of tenant they were did they make their payments on time were they ever late or miss a payment and why did they provide an explanation when they moved out how did they leave the condition of your property you also want to check their credit and if they have any personal references i would absolutely call a few of those and do some digging, ask some questions, and try and just make sure whatever they put on their application matches up. When you do look at their job, I would, in their financial information, have them fill out a balance sheet or an asset sheet, and then ensure that you use the three to one rent to income ratio rule.
So they need to be bringing in three times as much income as the rental amount that you're charging. That's just a safe kind of go-by number that a lot of people use in the industry. After you've found your tenant, or actually probably before you find your tenant, you also need to consider how are you going to manage this property.
Are you going to do it yourself? If you do it yourself, that's great. Welcome to being a landlord.
But also keep in mind you're going to get calls for minor repairs and maintenance. You're going to need to know maybe how to fix some minor things to not have to always call a handyman out to the house, which can get expensive. You're gonna need to know when and how to collect rent checks and convey that to the tenant.
Are they doing it electronically? Are they sending in the mail? Are they sending it straight to a bank? Are they able to do some sort of online payment, automatic withdrawal?
Are you gonna meet them at the house a certain day and time? to pick up the check and make sure keeping good records you want to make sure your finances are in order i recommend opening up a separate bank account possibly two one for your deposit check for that rental you can even keep that escrow if you want but definitely set up a separate account for that so that money stays separate because when this tenant moves out if the house is in good condition they are entitled to that money back minus any repairs or maintenance of anything that was listed within the lease for the expectations you set up front for when they move out or if there's a cleaning fee or or the like. The second account I would use would be for the rental income so that you're keeping track of that. Have your buffer in there for any maintenance issues that might arise so that you're not pulling from your personal account so that when tax time comes you have a very good grasp on what's been spent, what's coming in, what's coming out, and things are accounted for. And it just makes doing your taxes easier and your accountant will thank you.
Now, on the flip side, you can use a property management company. If you think, hey, I've got a full-time job. I don't have time to be a landlord. That's okay too. Definitely do your research.
The industry average is 8% to 12% of the collected rent monies every month. So depending on what rent is in your area, do the math. But that can be a major hit to your bottom line every month.
So. Weigh that into consideration when you're punching in the numbers, figuring out what rent you can charge, how much is your mortgage and all your expenses, because that's not something that you want to kind of be surprised of. Do your research, make sure that you're calling these places, interviewing, I would interview at least three. If you know other people in the area, that use property management companies, I would get their personal feedback as well because not all property management companies are the same and you can have very different experiences with any of them. I will say that I have noticed that people not people, companies, not only do they charge the percentage fee every month to manage the property, if they help you find a tenant, they will charge a lot of times like first month's rent or something like that.
you have a real estate agent helping you find a tenant you're going to have those fees as well now keep in mind when you talk to your accountant these are also things that are likely tax deductible so while they are hit to your bottom line it's something that you should be able to write off but according to your specific situation definitely talk to your accountant and i know that was probably a lot of information in such a short amount of time i could have gone on and on about this topic there's just so much to consider when you're renting out your first home and purchasing a second one it can be an amazing experience and it allows you to to grow get a second home whether it be bigger or downsized and then have a second form of income other than your primary job so it can be rewarding i hope you enjoyed this video i hope it gave you some things to think about and people to talk to if you are considering purchasing a second home and renting out your first don't forget to subscribe to my channel hit the bell icon to get notified for all my new videos and lastly make sure to check out the other videos that I have whether you are in between buying and selling I have some great tips on where to go if one house sold and you can't move into the next one and this might apply to the situation if you can't close on your second home but you've already rented out the first what do you do so go check out that video and we'll see you again next week