Can I Rent My House and Buy Another?

If you’re thinking of renting your house out while purchasing another, you likely have a lot of questions about how to make it all work. Whether you’re contemplating becoming a landlord by choice or by necessity, financing the investment is almost certainly a key concern.

The good news is that, while purchasing a second home may seem out of reach at first, there are actually several good options that will allow you to become an  income property owner within your budget and with minimal risk. Many beginning real estate investors have to get creative when it comes to finding funds for their first purchases. Here are some of their top strategies:

1. Use a Local Bank

Local banks tend to be more community-focused than national institutions, and will often work with beginning real estate investors to provide financing, especially when there’s a solid business plan in place. In addition to knowing more about local properties than a distant corporate bank, you’re local loan officer likely knows you personally, and he or she is likely to consider your character and history when it comes to signing off on a loan. Even if you haven’t already established a relationship with a local bank, a loan officer from your community bank or credit union should be able to sit down with you and provide several options for financing the purchase of a second home.

2. Obtain Seller Financing

“Seller financing” simply means that the seller of the home you’re interested in provides you with the loan you need to make the purchase. Instead of making you a cash loan, as a bank would, the seller agrees to let you take over ownership of the house, while you pay him or her the purchase price over time, with interest. While this ties up whatever equity the seller has in the home,  it allows her to collect the interest payments that would otherwise have gone to the bank. More sellers than you might think are amenable to providing buyers with financing, especially in a down market.

Another form of seller financing is called the “seller second.” This is where the seller loans you enough money for a down payment, to allow you to qualify for a traditional mortgage that covers 80% of the purchase price. Sellers eager to rid themselves of their homes (as many are, in this economy) may well agree to this if you ask.

3. Do a Lease-to-Own Deal

There’s no reason why you can lease-to-own a second home while renting out your first home. Under the terms of a typical lease-to-own (or “rent-to-own”) contract, you’ll pay a small “option fee” (generally 1 to 5% of the property’s value) up front, which reserves your right to buy the house at the end of an agreed upon period, usually three to five years. After that, a percentage of each month’s rent will go toward the purchase price of the home. At the end of the leasing period, you’ll have amassed the equivalent of a down payment through the option fee and your monthly payments, at which point you’ll qualify for traditional financing.

There are some common contract clauses to keep in mind with lease-to-own properties. If rent is not paid on time then the portion set aside for purchasing the home may be rendered void. Also, as the intent is ownership of the property, the landlord might include that he or she will be not be responsible for any maintenance on the home.

Conclusion

Don’t let the challenge of financing a second home deter you from investing in rental property. With determination and a little bit of creativity, you’ll be an income property owner in no time.

Tags: finance rental investment, rent my house and buy another

Category: Renting My House FAQ