Playing with the idea of purchasing a second home and renting out our current home and was curious about what considerations I should be thinking of. This is just an idea at this point and we haven't made any moves towards this yet.

Loan options? I assume the rates for a second mortgage would be slightly higher. Current home has a very good interest rate and we owe about $100K and have roughly $230K in equity. We should have enough for a down payment, but would a HELOC on our existing home be possible to cover a down payment?

Haven't decided if we will be the landlords or outsource it to a management company. Any recommendations on management companies?

Would it be possible to keep the homestead exemption on our current home? I assume not, but the exemption has kept the taxes reasonable and as soon as it is removed, the taxes would increase quite a bit.

What other considerations should be take into account before making a move?

Location?

You can only have a homestead exemption on the home you LIVE in. So the new home would have the exemption.

If you plan to occupy the new purchase if would not be a second home for mortgage purposes.

If you have sufficient equity in the existing house a HELOC might be an option based on qualification.

The first thing you should probably do confirm you can qualify for the new primary residence without selling the existing home.

If you cant qualify without selling your home, Jay at ags reward has a bridge loan product that will allow you to buy a new home without selling your first, then you refinance once you have a signed lease on your first home. I just did this and it worked out fantastically. If you use Red Pear realty, you will get a 2% rebate on the purchase and that can roll right in to covering the costs of the bridge loan. I would advise against a management company y because there really shouldn't be much you need to do on a regular basis. The busiest times would be move in and move out. There really isn't enough ongoing stuff to justify paying someone 10% every month or whatever it is. Doing the above is probably the best financial decision I have ever made, at least it sure feels that way right now.

Again, location?
We did this about 2 years ago, just before covid lockdowns, and it's one of the smart things I've done. Now, both our primary and our former primary are in 3.25% APR loans. Both have appreciated quite a bit over the last 2 years. We just signed our tenants to a 3rd year.

Like ^ said, if the new home is going to be your primary then the loan won't be a secondary/vacation/investment loan.

I've posted before here, but one pro about renting out your former primary is there are fewer unknowns (compared to buying a rental and renting it out). Since we lived in the house 12 years we know everything about it, all the repairs we'd done, what hadn't been done, etc.

We are self managing and will continue to until we acquire a bunch more rentals.

A few considerations in deciding:

-What is rental market? Conservatively, what will your monthly cashflow be, minus expenses?
-What large repairs can you foresee in the next couple of years, and how will you pay for them?
-Tenant screen. Tenant screen. Tenant screen. It's worth it to take the time to find the best tenant instead of settling for a questionable one.

Location is SW Houston. We refinanced in the last couple years and have an interest rate of 2.825%.

I think most of the major repairs have been completed and are several years away. A/C system was completely replaced earlier this year and kitchen was remodeled a few years ago. Only exception would be the roof which is roughly 15 years old, but hasn't had any issues so far. Original cast iron pipes haven't disintegrated yet, but seems like a matter of time.

Looks like self managing is the way to go with just one rental. I still need to do some research into rental rates in our area, but I think we should be competitive.

Thanks for the input.

Sea Speed said:

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If you cant qualify without selling your home, Jay at ags reward has a bridge loan product that will allow you to buy a new home without selling your first, then you refinance once you have a signed lease on your first home. I just did this and it worked out fantastically. If you use Red Pear realty, you will get a 2% rebate on the purchase and that can roll right in to covering the costs of the bridge loan. I would advise against a management company y because there really shouldn't be much you need to do on a regular basis. The busiest times would be move in and move out. There really isn't enough ongoing stuff to justify paying someone 10% every month or whatever it is. Doing the above is probably the best financial decision I have ever made, at least it sure feels that way right now.

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I used to think along these lines. I had a condo in college station that started off fine, but I had to take a renter that ended up struggling to pay rent, ignored hoa rules and was just terrible to deal with. I live a couple hours away and just couldn't deal with it all due to work and kids. I needed to get her out but wasn't real confident in the process. I ended up getting a property mgmt company to come in and take care of the eviction process and then called in all the people necessary to fox the 12k of damages that the lady left me with. They then handled everything I needed on the property while I sold it snd negotiated with the buyer…. Personally, if I could go back, I would have used this company from day 1. Not everyone has the same experience or situation but all it takes is one terrible tenant and you'll wish you had someone else to deal with it all.

Bridge loans are pretty common and come in several forms. HELOC on the old home, a temp second loan on the new property. You must qualify for all the debt so a thorough pre-approval from a lender is a must.

If you manage it as said you need to be available and fairly close by. I have investors that deliberately rent slightly lower then market to get maximum interest and can cherry pick the best renter they get an application. I'd go that route to start.

You get the same primary pricing in the new home as the last but can only homestead the one you live in.

If you go second loan option make sure you learn the details on paying off early. Lots of lenders are now going with prepayment penalties for early payoff but you can find some that don't. 10% down is a sweet spot so if you have enough for the 10% you can skip the second lien altogether. If high credit scores PMI Is very affordable compared to interest in the second lien

Yep. I hope it works out in every case but a lot of time it doesn't. Best friend from college rented out his first place. He was selective about who picked, mainly excluding college kids. An older lady rented it and after about 6 months she just quit paying. He finally was able to evict her and literally had to rip out every square inch of flooring because she let her dog (which she wasn't supposed to have) piss and **** all over the house and not once did she clean it up. Had to completely redo the bathrooms because god only knows what happened in them. Looked like she used the shower as her toilet

The silver lining is I filed a vandalism claim and it was all paid for… but what a huge pain in the ***.

I just feel like with a little due diligence up front you can avoid a lot of those situations. Not only that, but a decent sized SFH in a nicer neighborhood will probably attract a different kind of tenant i would imagine. Could be wrong though.

One of the biggest mistake for a rookie landlord is not regularly inspecting their rental property.

At minimum you need a monthly drive by (why you need to live close by) and quarterly home inspection of some kind. You have to have a tenant that agrees to regularly scheduled walk throughs. If a renter won't agree to inspection in the lease move on.

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Bridge loans are pretty common and come in several forms. HELOC on the old home, a temp second loan on the new property. You must qualify for all the debt so a thorough pre-approval from a lender is a must.

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The advantage to our bridge loan is the you do NOT have to qualify for a conventional loan at the time of the bridge loan. You just have to be able to qualify when the departing property is sold or in the case of buying a home then renting out the previous home, you need to qualify after the departing residence is sold. These are our portfolio loans held on our balance sheet, not brokered product. In a HELOC or a second lien as you described you would have to qualify with all mortgages by closing. .

SteveBott said:

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One of the biggest mistake for a rookie landlord is not regularly inspecting their rental property.

At minimum you need a monthly drive by (why you need to live close by) and quarterly home inspection of some kind. You have to have a tenant that agrees to regularly scheduled walk throughs. If a renter won't agree to inspection in the lease move on.

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I agree with this for sure. We have really good tenants in one of ours. When their first year was almost up I went by to sign an extension and didn't even go in the house. Just the garage, attic and backyard. When year 2 was up I did go inside. The place was spotless! They had even done some repainting. It was cleaner than it was 2 years ago.

But that could have really gone bad, and I should have inspected after year 1. I got lucky.

Updates OP? you decide what you were going to do?

Surprised that no one mentioned capital gain taxes. If you convert your house into a rental property, you will most likely have to pay capital gain taxes on any appreciation from the time of purchase. May not be a deal breaker but definitely something to consider especially if you have a lot of upside.

https://www.investopedia.com/ask/answers/06/capitalgainhomesale.asp

Well I found out that my mother-in-law hit up my wife to cover two months of her mortgage last week, so I don't think I will be making any major life decisions until I can sort out this sh/t show.

Interesting thread and we are looking at a similar situation and had most of the guys OP originally asked.

The one difference is we are looking to purchase a new home and rent it out…meaning staying in our existing home.

We are looking to eventually build on the new home purchase but aren't ready to do for at least 2-3 years but want to make sure we secure the lot/new home before prices get too crazy.

Does the same basic premise and most answers apply for my situation as well?

Your new home would be an investment property. Loans have higher costs and you need 20% down but 25% is better.

I would buy the lot and wait to build until ready to move in.

HeightsAg said:

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Surprised that no one mentioned capital gain taxes. If you convert your house into a rental property, you will most likely have to pay capital gain taxes on any appreciation from the time of purchase. May not be a deal breaker but definitely something to consider especially if you have a lot of upside.

https://www.investopedia.com/ask/answers/06/capitalgainhomesale.asp

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This is only if you transfer ownership. If you buy a home under your own name then decide to rent it later, you do not owe capital gains taxes at that time (under current tax law, although certain politicians have proposed changing this system to tax unrealized capital gains).

SteveBott said:

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Your new home would be an investment property. Loans have higher costs and you need 20% down but 25% is better.

I would buy the lot and wait to build until ready to move in.

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Yes only problem is in the area of Houston we are looking there really aren't many lots. Almost everything developed but we we eyeing some "deals" where we can buy the house rent it for a few years and then bulldoze and start new build when ready


Again in "theory"

Ah I mistook your post meaning a new build. Not a scrape. Just buy as an IP.

If you lived in your primary for a year, then you can buy your next house a primary with only 3% down. If you do it as a second home it's 15% and rates are worse