Can You Afford to Buy a New Home and Rent Out Your Old One?

When it comes to buying a new home, most people decide to trade up to gain additional space, live in a better neighborhood, move to a home in better condition — or any combination of these. For many home buyers, particularly those with a good deal of equity in their current home, it begs the question: Do I have to sell in order to buy?

Real estate is always meant to be a long-term hold. Building equity and passive income are why so many people turn to real estate to build wealth. If you can afford to keep your home while purchasing another, do so.

If you want to make your first foray into real estate investing, you’ll need to take several steps. Meet with a mortgage and real estate pro, and do some early research to determine if owning two homes is feasible for you.

Determine your current purchasing power

If you were to sell your home and take out that equity, how much can you afford to spend on a purchase, and what type of home will that get you? Check with your real estate agent and go to open houses to see what you can buy for your money.

This number is going to be high because you would be putting all your eggs into the new purchase. If you choose to keep the old home as a rental, you may not be able to buy your dream house.

Understanding what you are giving up will help inform your decision of whether you want to be a landlord.

Calculate your purchasing power without that equity

If you keep your old home, you will likely have to compromise on your new home’s location, size or condition. Go check out homes at lower price points to understand what you will get for the money.

If you are open to becoming an investor and building wealth in real estate, this compromise won’t be a big deal. But if you aren’t comfortable with your purchasing power without your existing home’s equity, then it might not make sense for you.

Understand your monthly income and expenses

If you are open to taking the plunge, the next step is running the numbers to understand your potential new financial reality.

First, understand the rental market. You’ll have to know how much rent you can fetch for your current home. Browse rental listings online or ask your real estate agent to show you comparable rental properties.

Will the rent cover the mortgage exactly? Could it be a small loss? Sometimes an investor will be open to taking a small loss in the near term to build equity in the long term. As you run your numbers, take off 10 percent to account for issues like vacancies, necessary improvements and repairs.

Move forward with your decision

Just like someone who would be buying at the same time they are selling, someone who is keeping a home as a rental should prepare for stress. Timing it is never easy, and nobody likes to carry two mortgages for too long.

Unlike buyers — who can shop and make offers knowing they won’t move in for two to three months — renters generally search within weeks of their desired move-in date.

Once your new home is under contract and you have removed your contingencies, it’s time to get the existing property on the rental market. It’s better to show the home with your furniture than empty. If you can manage it, start showing the home for rent within a few weeks of your purchase closing.

Choose a renter wisely

Becoming a landlord means starting a business. You tenant will become your customer, and it’s better to have a good customer than a bad one. You’re better off with a pleasant, reliable tenant paying a little less than market value than a cranky or difficult tenant paying market value or more.

You also want a tenant who plans to stay. Turnover means wear and tear, and potential lost rental income.

Arrange for a helping hand

If you are moving out of the area, consider hiring a property manager to handle your new rental home. Not only can they deal with repairs or complaints from the tenant, but they collect the rent and enforce the terms of the lease, if necessary. Property managers have teams of repair specialists and contractors who can fix problems.

Research tax considerations

Owning real estate as an investment opens up a new world of tax issues and events. Before you sign on the dotted line, check with your accountant.

Understand the following important points:

  • Your new rental income is taxable.
  • Improvements and repairs have tax consequences.
  • You may lose the homeowner’s tax benefit when you sell the rental property. If you’ve lived in the home for two of the past five years, then you won’t pay taxes on any gain ($250,000 for individuals and $500,000 for married couples) when you sell it. Once you pass this time frame, you are on the hook for the gain.

Being a landlord is not for everyone. As with any real estate transaction, never rush — and never go in with blinders on.


Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

About the Author

Brendon DeSimone is the author of "Next Generation Real Estate: New Rules for Smarter Home Buying & Faster Selling," the go-to insider’s guide for navigating and better understanding the complex and ever-evolving world of buying and selling a home. DeSimone is the founder and principal of DeSimone & Co, an independent NYC real estate brokerage providing individualized services and a fresh, hands-on approach. Bringing more than a decade of residential real estate experience, DeSimone is a recognized national real estate expert and has appeared on top media outlets including CNBC, Good Morning America, HGTV, FOX News, Bloomberg and FOX Business. Consumers often call on Brendon for advice and to help them find a real estate agent. You can follow him on Twitter or Google Plus.

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