Introduction

Upgrading from a starter home to your dream home may seem daunting in today’s high-interest environment and unstable housing market. As a homeowner, however, you have a strategic advantage that may help you bridge the gap. Renting out your home, or even a few rooms, can be a great way to earn extra income to put toward the home you really want.

Before you begin, it’s essential to understand the process, as well as the benefits and downsides, of renting out your home to buy another property.

Should You Rent Out Your Home to Buy Another?

Deciding whether to rent out your home may depend on your circumstances. If you don’t have enough cash for the down payment, renting out your current home can help you generate income to add to your savings and apply to your down payment.

For example, your reason for wanting to move could be that your family is growing and you want more space or better local schools. These are both factors that could cause your new home to come with a higher price tag and require a bigger down payment.

Buying a home is one of the most important financial decisions you’ll make in your lifetime. It follows, then, that renting out your current home to purchase a second property is worth thoughtful consideration of the benefits and drawbacks of doing so.

Pros of Renting Out Your Home

• Earn passive income: Renting your home may provide positive cash flow if the rent amount you receive exceeds your housing costs, including your mortgage, insurance, and maintenance. This additional income could help you afford a more expensive home.
• Leverage a paid-off home: If you have substantial equity in your home, or, better yet, you own your home free and clear, you may be able to tap into your home’s equity. That could give you the cash needed for a down payment on a new home or even to purchase one outright.
• Receive tax benefits: You can deduct some expenses from renting out your home. According to the IRS, if you collect rental income, you may deduct mortgage interest, property taxes, depreciation, repairs, and necessary operating expenses.
• Build wealth: Since real estate prices have historically appreciated over time, you could continue to build equity in your current home and your new home.
• Potentially qualify for a larger loan: You can usually include rental income when you apply for a mortgage, but you must meet specific eligibility criteria.

Cons of Renting Out Your Home

• Hassle: The responsibility of having tenants and managing the property can make being a landlord a chore. Ask yourself if you’re comfortable dealing with tenants and handling repairs.
• Risk of becoming underwater on both mortgages: If property values drop, you could end up underwater on two mortgages.
• Unpredictability in the rental market: As a landlord, you may go through periods when your property sits vacant or when tenants don’t pay rent.
• Lack of liquidity: Generally, real estate is a long-term investment that is not the most liquid asset.

How to Rent Out Your Home to Buy Another

Before deciding to rent your home, do your due diligence to ensure the strategy makes financial sense. Start by calculating the costs of renting out your current home. Additionally, assess the local rental market, including the demand for rentals and the average rental rates for similar homes in your area. Weigh the pros and cons and consider your risk tolerance level.

If you decide to turn your current home into a rental property and buy another home to live in, here are the steps to make it happen:

1. Consult your insurance agent: Make sure you have enough liability coverage in case a tenant sustains an injury in your home. Consider getting landlord insurance that can help to protect you against costly repairs.
2. Get your home ready for a tenant: Make any repairs or improvements to your home to ensure it’s in good condition for new tenants.
3. Advertise your home for rent: Listing your home on several online platforms and enlisting a local real estate agent to market your home are two ways to shine the brightest light on your rental opportunity.
4. Screen potential tenants: Review applications from potential tenants to ensure they have a solid rental history, no record of eviction or criminal activity, and adequate income to pay the rent.
5. Sign a lease agreement: Once you find a qualified tenant, create a rental agreement that details the arrangement’s terms and conditions.
6. Apply for a new mortgage: With suitable tenants ready to move into your current home, it’s time to turn your attention to securing a mortgage loan for your new home.

Alternatives to Affording Your Dream Home

It’s possible to afford your dream home without renting out your current house, but it may require a longer time frame. Consider these alternatives to help you purchase your dream home:

• Shore up Your Credit File: Taking steps to improve your credit can boost your approval odds for a mortgage with low interest rates.
• Save for a Large Down Payment: Making a larger down payment can help you qualify for a larger loan amount you may need to purchase your dream home.
• Increase Your Income: Boosting your income can not only help you save for a large down payment, but it’s also one of the most important factors lenders consider when you apply for a new home loan.
• Reduce Your Debt: The other way to lower your DTI is to reduce your debt. If possible, pay off any loans or credit card accounts with low balances.

Conclusion

Renting out your home and purchasing another property can deliver a wide range of benefits and downsides. Ultimately, the decision to follow this strategy is a personal one that will depend on how you feel about several important considerations.

If you decide to follow this path, make sure your credit remains consistent throughout the mortgage process. Your lender will review your credit when you apply and could check it again closer to your closing date to make sure there have been no significant changes.

For expert guidance and assistance with your mortgage needs, contact O1ne Mortgage at 213-732-3074. Our team of professionals is here to help you navigate the complexities of renting out your home and purchasing another. Let us help you achieve your dream home goals!