6 tips for getting a new mortgage when you already have one.
Money Girl
268 MG Should I Sell My Home or Rent It Out?
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[MUSIC] Hi, friends. I'm Laura Adams, and you're listening to the Money Girl Podcast. [MUSIC] A reader named Aaron asks, "I live in a town home and want to buy a bigger house in a better neighborhood. But I'd like to keep my town home as a rental property. What are the rules for getting a new mortgage when you rent out your house and buy another one?" Becoming a landlord certainly isn't for everyone. However, having tenants who pay enough rent to cover your mortgage and give you extra monthly income can be a fantastic investment for now and when you retire. Keeping your old home as an investment property is one of the easiest ways to become a landlord. In fact, that's how I got my start as a real estate investor. All you have to do is move out and stick a "ferent" sign in the yard. Getting a mortgage for a second home is just like the process you went through to buy your first home. Approval depends on your income, savings, down payment, credit rating, and debt-to-income ratios. Buying a second home that you plan to live in doesn't require you to pay a higher down payment or have a certain amount of equity in your existing home, you simply have to prove that you can afford two mortgages. Not only is it easier to rent your house and buy another one, but it's less expensive than getting a loan for an investment property. A mortgage for a non-owner occupied property requires a larger down payment, like 20 or 30 percent. And always comes with a higher interest rate than a loan for a house that you plan to live in. Before you start shopping for a second home, here are six important tips to make sure that you're ready to own a rental property. Tip number one, review your existing mortgage. Some mortgages don't allow you to convert your residence into a rental property without paying a penalty or refinancing into a more expensive non-owner occupied loan, or they may require a one-year waiting period before you can rent out the property. Once you switch your insurance from a homeowner's policy to a landlord or commercial policy, the lender will definitely know that you're not living there anymore. So read your mortgage or call the lender to make sure that you understand what's allowed. Tip number two, research the rent. Never assume you know how much rent you can get for your home. In some areas, the going rent is less than what it costs to own a home. So consult with several local property managers about actual rents that investors are getting for homes similar to yours. If there are no comparable rental properties close to your home, try advertising your property for rent at the price you'd like to receive and see if anyone is interested. Tip number three, estimate the ownership cost. Once you know how much rent you could charge for your home, subtract your carrying costs. These include all the expenses of owning and managing an investment property, not just your mortgage payment. Get an estimate on a landlord's insurance policy because bad tenants can destroy your home and be a huge liability if something goes wrong. Add up the cost of this insurance and your property taxes. Plus, you may need to cover the cost of homeowners association dues, yard work, pest control and utilities. I'll put a link in the show notes to an investment property calculator you can use to make sure owning a rental would be profitable for you. You'll find it on the money girl page at quickanddirtytips.com. Just look for episode number 268 called "How to rent your house and buy another one." H5N1 bird flu is spreading in some animals. If you work with poultry, dairy cows, wild animals or with raw, unpasteurized milk, wear protective gear and take precautions. ctc.gov/birdflu, a message from CDC. I love learning and anything that makes learning easier. If you're a parent and your child needs some homework help, then IXL is a right for your family. IXL is an online learning program for kids covering math, language arts, science and social studies. IXL has interactive practice problems for topics from pre-K to 12th grade and everything is organized by grade and subject. As kids practice, they get positive feedback, awards and explanations for wrong answers. IXL figures out what your kids need more help with and recommends more topics to practice. Their videos, lessons, sample problems and learning games too. One subscription to IXL gets you all subjects and all grade levels. Membership started just $9.95 a month. It's no wonder IXL is used in 95 of the top 100 school districts. I think the positive feedback that IXL gives is really crucial when it comes to learning. So make an impact on your child's learning, get IXL now, and money girl listeners can get an exclusive 20% off IXL membership when they sign up today at ixl.com/moneygirl. Visit ixl.com/moneygirl to get the most effective learning program out there at the best price. Hey Denver, not ready to end that trip? Fly Southwest with no change or cancel fees. So this sun-kissed couple can stay in vacay mode longer. Reality? Oh that can wait. And this outdoorsy guy can get home early to catch that sunset hike. Plus an amazing view! Well, this hard worker can add one more out of office day. And I'm not checking my email. No change or cancel fees. That's a big flex. Only at Southwest. Fair difference may apply. Failure to cancel a reservation at least 10 minutes prior to schedule departure may result in forfeited flight credits. Tip number four. Factor in vacancies. In addition to a rental property's known expenses, always factor in the unknown by using a 10% annual vacancy rate. For example, if you charge rent of $1,000 a month or $12,000 a year, have at least $1,200 or 10% of that annual amount set aside. That's the minimum cash cushion you should keep on hand to be prepared for unexpected repairs or a tenant who disappears in the middle of the night. Tip number five. Consider using a property manager. I always recommend that you budget enough to hire an experienced property manager. They charge about 10 to 15% of the rent, but can pay for themselves by getting you the best rental price and saving you time. A good property manager will screen tenants, execute leases, get estimates for repairs, and take those annoying late night emergency maintenance calls. If you decide to manage a rental property yourself, you'll need to understand landlord and tenant laws for the state where you live. I'll put a link to an excellent resource for this in the show notes. Tip number six. Get a mortgage preapproval. It's never too early to meet with a lender for a free consultation about whether you can afford to buy a new home and keep the old one as a rental. Always get a mortgage preapproval before you start shopping for your first or second home. Lenders can give you a preapproval letter after they review and verify your financial information. It shows the maximum amount you can borrow for a certain period of time. However, remember that you shouldn't borrow the maximum amount if it would be a stretch for your budget and overall financial goals. Not only does a mortgage preapproval help you shop for homes in the right price range, but it's an excellent negotiating tool. A preapproval buyer is more attractive to a seller who might be willing to take a lower offer than a higher one that's contingent upon financing. Once you confirm that you can turn your home into a rental, have a realistic expectation of its annual cost and get preapproval to buy a second home, you're on your way to becoming a real estate investor. For more money tips, be sure to sign up for the free Money Girl newsletter, join the Money Girl Facebook page, and follow on Twitter, where my username is @LaraAdams, L-A-U-R-A-A-D-A-M-S, with no space. For all this information and links to everything mentioned in the show, plus additional resources, visit the Money Girl page at quickanddirtytips.com. Just look for episode number 268, How to Wrench Your House and Buy Another One. I'm glad you're listening to Ching. That's all for now. Courtesy of Money Girl, your guide to a richer life. H5N1 Bird Flu is spreading in poultry and cows. It's rare in people, but bird flu can make you sick. If you work with poultry, dairy cows, wild animals, or withdraw unpasteurized milk, wear protective gear like coveralls, NIOSH approved respirators and eye protection, and wash your hands often. If you start feeling sick, seek medical care and tell them you work with animals. Learn how to reduce your risk at cdc.gov/birdflu, a message from CDC. You