Should You Buy a House to Turn It Into a Rental Property?
It is often said that real estate is one of the best ways to invest your hard-earned money. Real estate tends to appreciate more than traditional investment types, and properties are a hard asset that you can utilize throughout the time that you own them. Buying a house in Myrtle Beach, for example, offers you the unique opportunity to have your own beach house to use for a few weeks out of the year while getting paid to rent it out while you are not there. To many people, this sounds like a dream scenario. After all, once you have the house paid off, nearly all of the rent will be straight profit that you get to keep! It sounds like a situation that is too good to be true.
For many people, this works out to be a great situation and a great investment. However, buying a second house to use as a rental property is not a great option for everyone. This post is going to take a look at a few of the things that might bar you from buying a second house to use as a rental unit, and then will jump into a few of the financial incentives that long-term rental property ownership provides. We will note, for clarity, that we are not financial experts, and this post is not intended whatsoever to give financial advice. Everyone’s financial situation is different, and we are solely commenting on the typical strengths and weaknesses of buying a second home to use as a rental property.
The Main Limitations to Buying a Second House to Use as a Rental Property
1. It is Expensive
This should come as no surprise, but it obviously needs to be said. Buying a house is expensive. Really, buying a house anywhere is expensive, but buying one in a vacation hotspot, like Myrtle Beach, is even more expensive. One of the biggest hurdles for most people that want to buy a second home is simply the amount of cash needed to do it, as most people are still working on paying off their first house and do not have the financial flexibility to take out a second mortgage at the same time.
Granted, this is not the case for everyone and does not need to be a hurdle to buying a second home. Yes, if you are struggling to make your payments on your current home, buying a second home is probably not the wisest investment idea. However, if you are in a solid financial position and are looking for a way to increase your future income, buying a second house could be a great idea, even while you pay off your first mortgage. If you are able to drum up enough rent to cover the mortgage payments, then the up-front risk is much lower than it could be otherwise.
If you are worried about how you will finance your rental home, there are several great tools that have been designed to help you navigate the costs and dollar values that you will encounter throughout the process. Your bank likely has its own mortgage calculator tool, and there are many other startups that have been designed to help you visualize the different costs that you might encounter on your homebuying journey. It is very important that you make the most informed decision possible, and these different tools are the best way to clearly see what you are up against.
2. It Needs to be Maintained
Keeping track of all that needs to be done in your first home can be a daunting task. There is so much that goes on in a home, and there are so many tasks and responsibility that accompany homeownership. Things break, things get old, accidents happen, and disasters can take a toll on all that you have worked to build. Dealing with these headaches in your own family home can be a tall task! Dealing with these headaches in a second home can be even more daunting, as you might not even live anywhere near the home. This is often the biggest part of the challenge, actually; dealing with all of burst pipes and leaky rooves from a long distance away.
On top of just the maintenance and repairs, you need to consider cleaning. If you are renting out the house to longer-term tenants, then cleaning is not much of an issue. However, if you are planning to use a platform like Airbnb which focuses more on shorter stays, you will need to have the house spick and span between guests. This will absolutely require a deep cleaning, which can become quite a bit of work to put on your own shoulders!
If you fit the profile of someone looking to buy a second home that is not very close to where you already live, there is some good news! You can consider using a property management company to handle those issues on your behalf while you are away. Many times, these companies will handle all of the work, maintenance, and cleaning for you and in return charge you for parts and labor or take a percentage of the incoming rent. While it takes a direct bite out of your investment income, this can make owning a second property a fairly stress-free experience. As the idea of buying homes to use as rental properties becomes more popular, more and more of these property managements companies spring up all over the place.
3. It Requires a Lot of Work and Time Up Front
Buying a house is a long-term commitment, so it is no surprise that you are signing up for a long time of payments, negotiations, and hassles. However, it is also important not to understate the amount of work that is required on the front end before buying a second house! There is so much that goes into the process of buying a house to use as a rental property, and it is not a process that will end in just a month or two.
If you want to do things the right way, you will take your time to find the perfect house to begin with. Usually, a realtor is the best way to do this. Realtors know the local market the best, and they are usually the ones who can unlock worlds of opportunities for you as you shop for a rental property. If you are ever looking for property in South Carolina, be sure to reach out to us first to answer any questions that you may have!
Finding the perfect rental property is not a simple process. You need to look at the property from both a feasibility perspective and a profitability perspective. There is usually a sweet spot between the two that can maximize your gains while minimizing your financial stress. The best rental properties tend to be right in the middle of the action, but those properties are also sold at unreachable price points. Combining the two approaches of profitability often leads to the best results, as you buy a solid rental property that will generate good interest and rent without breaking your financial strength in the process.
4. There is Risk Involved
Another hurdle to buying a second house to turn into a rental property is the inherent risk that it involves. To be fair, a rental property is an investment, and all investments come with risk. However, one of the most intimidating components of the risk that comes with buying a rental property is the sheer amount of debt that is required up front. Buying a rental property means agreeing to taking on hundreds of thousands of dollars of debt in exchange for the chance to make back that money and more. When things go well, this opportunity sounds like a no-brainer. However, some investments fail, and when a rental property fails, you are out a big chunk of change.
This is not meant to be discouraging. Rather, we are simply pointing out that this risk scares off a lot of people and is certainly one of the biggest hurdles involved in the process of buying a second home to use as a rental property. Other investments, like stocks, bonds, and other tradeable assets, offer much lower returns but significantly lower risk. Real estate is a risky investment – especially when we are talking about rental properties – but it is also one with a very high potential ceiling. If you are able to pay off the mortgage and all of the up front costs, the property is likely to become extremely profitable and is yours for as long as you want it. If you manage to get it to this point, it is considered what people call a cash cow, as you can rely on it for seemingly endless cash over time with minimal responsibility and upkeep.
5. You Need To Find Good Tenants
Apart from all of the things involved in finding, financing, buying, and preparing the perfect rental property, you need to think about what comes next; who will live in it? Will it be a long-term rental, where you require tenants to sign a lease for a year-long commitment? Or will you opt for more of an Airbnb arrangement, where guests come and stay for just a couple of days? Each method offers different opportunities to you as an investor, and each method requires different types and levels of effort.
Choosing to find long-term tenants requires a lot less work on the day-to-day level once you have found a qualifying tenant. Typically, tenants want to be left alone and only reach out when they have a question, complaint, or problem. This is a much more hands-off route and is appealing to many investors for that reason. Additionally, you can rely on a fixed level of income over a fixed amount of time, helping you to budget better while also offering you financial security. For many, this is the most optimal route. The issue is just that finding good, long-term tenants is often a challenge. This method inherently requires a lot more effort on the front-end as a homeowner, and vetting the tenant is on you. You have no intermediary, so you are solely responsible for choosing someone who is trustworthy enough to live in your home.
Opting for go the route of short-term rentals, whether through an app like Airbnb or on your own, is a much more stress free on the front-end, involved on the back-end approach. Finding tenants is much easier, as the application does that legwork for you. Getting listed on the app isn’t all that hard, either. The hard part is cleaning and preparing the home before each stay, predicting how much income you’ll make through the app, budgeting for slow and busy seasons, and coordinating any response to guests’ issues that arise while you’re away. These issues can make the process of renting out your second home hard and are a deterrent for many people who want to get into the business of owning rental properties.
Financial Incentives To Buying a Second Home to Turn Into a Rental Property
While there are many things that may deter people from buying a home to turn into a rental property, there are also many incentives. After all, you are thinking about doing it, so there must be an upside! The biggest upside to having a second home to use as a rental property is that your investment can turn into what investors call a cash cow.
Essentially, a cash cow is an investment that has very low operating costs and very high earning potential. At first, if your rental property is bringing in $2,500 per month but costs you $2,400 per month to own and operate, you are not making very much money. However, once you pay off the mortgage, your costs might drop to $500 per month, making your profit more like $2,000 per month. Theoretically, this earning potential has a long life and can turn into a very strong stream of income. While this is not always the case, and there are unforeseen expenses involved with owning any home, it is typically accepted that a rental property that is fully paid off is one of the best cash cows out there.
In addition to the high earning potential, there is another perk that may come with owning a second home – using it! If you opt to use your rental home for short-term tenants, like on Airbnb, you can also use it for yourself whenever you want. You can’t do this if you have a long term tenant, obviously, as you can’t just kick them out of the place where they are living. However, apps like Airbnb allow you to block off dates that the unit is not available, meaning you can pick a few weeks or more per year where you stay in the home yourself without having to pay anyone for accommodation.
To many people, this is a huge perk. After all, many people buy a second home in a place that they could see themselves living in for the sole purpose of using it as a vacation home. If this is your goal, listing the house on Airbnb for the rest of the year is a great way to make some solid money while the house is not being used. In this way, owning the house is a win-win situation for you, as you make money off of it while you are not there, and you get to live in your favorite vacation destination when you are there!
Thank you for reading our blog, Catch the Wave. We hope that this post helped you to think about some of the biggest hurdles involved with buying a second home to use as a rental property as well as some of the best reasons that buying one might be worth your while. While the points in this post might come off as slightly scary or intimidating, they are not meant to be! They are simply meant to be an honest representation of what you might face if you decide to buy a rental property. We believe it is important that you fully understand what you are getting into before signing off on any kind of mortgage on a rental property! Also, just to reiterate, we are not financial experts and by no means should anything in this post be taken as educated financial advice. The content of this post is strictly meant to be informational, and we make no recommendations as to what you should do with your money.
If you visit Myrtle Beach or any other place in South Carolina and fall in love, reach out to us for help. We at The Boyd Team are always here to help you figure out whether Myrtle Beach is your next home or not, and we are committed to helping you find the right property for your needs and dreams. Any question that you have about moving to the area and finding your dream home by the beach is our pleasure to answer. Feel free to send us an email at firstname.lastname@example.org or text or call us at (843) 222-8566, and we will get back to you as soon as we can. Being true natives of the Grand Strand and Horry County and with over 25 years of experience in the local real estate market, whether buying or selling, we can help you make your dreams a reality.
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