By Brandon Scott
The idea of purchasing your first home is significant, then you reach a point where you begin to feel like you understand the real estate game. The monthly mortgage payment that you initially thought was too much, you now pay without blinking. The fear that you would never be able to afford furniture or go on vacations, now, you’re doing both, and then some. Yep, you’re pretty much a homeowner pro via on the job training.
All of a sudden, you have a reason for another house, a second home. If you’re like me, you purchased in a perfect location. I literally mean perfect, over $300,000 in equity and rising, so we have no immediate desire to sell but we do need more space. However, this is DC, and I’m a Realtor so I’ve already checked out the coming development and I would simply be shortsighted to sell now. Many of you are in the same or similar place, regardless you need to begin thinking about a second home.
Purchasing your second home is just like buying your first home, in part. You’ll still need a lender to provide you with a pre-approval, so be sure to maintain a relationship there. If you’re lucky, you worked with a lender that will continually reach out to you and offer you value. Plus, a lender will give you an idea of how much your buying power will increase when you have your home rented. That’s right; typically, a lender is able to count the rent you collect from a renter as income. This additional income can increase your overall buying power. And with a correctly structured plan, your current home can finance the purchase of your second home.
Next, consult a Realtor and your CPA. You want to begin working with a knowledgeable Realtor, this way you’re getting advice along the process both from their experience and their studies. Believe it or not, being a Realtor is a craft, so the amount of continuing education a person takes is a good indicator of their knowledge and commitment to the craft. Personally, I have a goal to complete 60 hours of additional training a year to stay refined and I am pursuing my brokers license. I am not doing this because I want to open my own brokerage right now, rather the training helps to run and manage a better business, thus delivering a better customer experience. We should always be growing, now I’ll get off my soap box. Finally, a CPA is going to be best equipped to help you manage the tax laws of owning multiple properties. Truly it’s outside of the scope of us Realtors to give tax advice, it’s a legal risk for any Realtor to take that on so my sound recommendation is to always consult with a professional in a respective area. However, I know you should begin to structure the home separately from yourself. Since a business is a legal entity, I have heard many advisers suggest LLCs and other entity structures to protect you from lawsuits and other liability claims.
Then, coordinate the process of renting out the home. The same way you would list your home, you want to take the necessary steps to prepare your home for a renter, and to begin thinking about managing the property yourself or having a property management service. A good place to start is your Realtor, he or she may have recommendations or manage properties, in addition to selling them. Thinking ahead about property management will be critical because once a tenant is placed, that will be the primary job. Don’t omit the need to understand and comply with your local laws and requirements. This also means, if you need to obtain a business license do that at the appropriate time. In many localities, if you rent a property and need to evict the tenant, without a business license the courts will not hear the petition to evict; maybe a property manager isn’t a bad idea.
There are certainly more things for you to consider, always remember that the devil is in the details but no one expects you to know everything. The primary reason we partner with professionals, whether it’s a doctor or barber/stylist, is having a team of people with answers and skills that make a difference.
For many people, the idea of a second home hasn’t crossed their mind. But owning multiple properties is the next step in the life span of homeownership. While the process can and will include many ups and downs, working with a host of professionals that have your best interest in mind is what makes the difference. Plus, setting yourself up with the right people and system for success is critical to reducing your heachaches along the journey to building wealth.
Brandon Scott is a licensed real estate agent in Washington, DC, Maryland and Virginia. His license hangs with Keller Williams Capital Properties in DC. He’s been involved in the mortgage finance industry for the last 16 years in various fields. You can reach him by email at [email protected] Subscribe to his YouTube Channel at RealTeaDMV