A guide to buying a second home and renting the first

Quick insights

Whether it’s for building wealth, diversifying your investments or simply upgrading your living situation, owning a second home can be a game-changer. In real estate, a second home is technically a property that isn’t serving as your primary residence, often used for personal enjoyment, as a rental, or both. 

Since you can’t be in two places at once, you may be wondering if it’s possible to buy a second house and rent the first. It is, and this guide will explain how it’s possible.

How to buy a second house and rent the first

In real estate, everyday language doesn’t always line up with legal definitions. For example, a “second home” can never be classified as your primary residence. So if you buy another property to live in and start renting out your original home, the first property becomes your “second home” in the eyes of lenders and real estate law—even though you bought it first.

That said, if your goal is to purchase an additional property and rent out the one you already own, here’s what you need to know about how to buy a second home and rent the first.

1. Define your goals

Homebuyers consider buying a second home and renting the first for many reasons. Here are some common reasons for buying and renting.

Using it as an investment property

Many secondary homeowners rent out their first homes to help cover the cost of their mortgage payments. It’s also a great way to build wealth through rental income. It creates a steady stream of passive income. This can help cover the mortgage on your second home or even generate extra cash flow for savings, investments or other expenses.

It also adds diversity to your real estate portfolio. Relying on a single property ties your entire real estate investment to the health of one local market. Buying a second home in a different location is a classic investment strategy to spread out risk. 

Think of it like putting all your eggs in more than one basket. If the real estate market in one city slows down or dips, your property value in another area might hold or even continue to grow.

Upgrading your living situation

Sometimes, the home you first bought is no longer the home you need. Maybe your family has grown, you’ve started working from home and need a dedicated office. Or you’re simply craving a different lifestyle, like a quieter suburban street or a vibrant downtown neighborhood. You may have outgrown your first home, but that doesn’t mean you have to let it go.

Buying a second home allows you to move into a property that better suits your current needs while retaining your first as a powerful asset. By renting out your original home, you can generate a steady stream of passive income that can help cover the mortgage on your new, upgraded property. 

Tax benefits

Owning a second home and using the first as a rental property may come with tax advantages. Many homeowners find they can deduct several expenses related to their rental property. But tax laws are complex, and consulting with a financial advisor about deductions is essential. These often include mortgage interest, property taxes, maintenance and repair costs and even depreciation.

If you use the second home for personal reasons part of the year and rent it out for the rest, specific rules apply. Generally, if you rent it out for more than 14 days a year, you must report the rental income. 

However, you can also deduct expenses associated with the rental. These deductions can lower your overall taxable income and make the cost of ownership much more manageable.

Future flexibility

Life is unpredictable, and owning a second home can provide a valuable safety net and a wealth of options for the future. This property can serve many purposes as your life and priorities change over time. It could become a home for your adult children as they get started, or a place for your aging parents to live comfortably and close by.

Further down the road, it might become your own retirement destination, a place you’ve already invested in and grown to love. Or, you could decide to sell one of the properties to fund a different life goal. 

Emotional attachment

For many, the first home they ever bought holds a special place in their heart. It’s where they made countless memories, celebrated milestones and perhaps started a family. The idea of selling it can feel like they are letting go of part of their personal history. Keeping the property as a rental allows them to preserve that emotional connection while still moving forward.

2. Do your research

If you plan to rent out your home, it pays to do your research. 

While it’s possible to find rental and vacation listings virtually everywhere on earth, some areas are less likely to draw renters, and the hot rental property you imagined owning could languish. Be sure to look at comparable properties in the area, and keep an eye on local attractions or events that could draw potential tourists and renters. 

Then, talk to a mortgage lender. Lenders will view your second home purchase differently. You’ll need a strong credit score, a low debt-to-income ratio and a down payment, typically 20%. Your lender will also want to see that you have enough cash reserves to cover several months of mortgage payments for both properties.

3. Consider a long-term tenant

You can often target vacation renters to your second home, but as mentioned above, this doesn’t always work in areas that aren’t considered vacation destinations.

Instead, you may want to find a long-term tenant. Having a renter in the house at all times provides a steady stream of income and means there is someone present in case of unexpected problems. If you’re interested in going this route, start by researching local realtors and property management companies that can handle the day-to-day difficulties of managing your property and finding renters.

When in doubt, look to your friend network. “I was going to get a management company to handle the rent payments and any repairs,” Higbee, who successfully bought a second home and rented out the first, said in an interview. But thanks to social media connections, he was able to find an acquaintance to rent the house and take on basic maintenance tasks. “When I did come into town, I was able to come over and see the place, hang out with my friends, and I knew they were taking good care of it.”

4. Consider local laws and restrictions

Before you decide to rent, it’s smart to look at local laws and restrictions. Many communities don’t want short-term tenants cycling through, and some even have strict laws and high fines to limit temporary rentals. 

5. Prepare your application and decide how you’ll pay

Once you’ve decided on the perfect property, it’s time to prepare your application.

First, calculate your debt-to-income (DTI) ratio. Lenders will want to confirm that you have enough income to pay for both mortgages. Review your existing debt, check your credit score and make sure it’s in good shape, as this can impact your loan terms. 

Next, take a hard look at your budget. Do you have an emergency fund to cover unexpected expenses for both properties?

Again, you’ll also need a down payment. If cash is tight, consider alternatives like cash-out refinancing on your current home, gift funds from family or down payment assistance programs.

Speaking of financing, you’ve got options for funding the rest of your purchase. A home equity loan or HELOC lets you tap into your current home’s equity. Conventional loans are a popular choice, but if you don’t meet their criteria, portfolio lenders or private lenders might be more flexible.

Is buying a second home a good investment?

Before you buy a secondary home, it’s important to weigh the costs and rewards of jumping into the property market. Instagram is full of inspiring before-and-after photos of country homes and yards. But would-be buyers should consider how much work they’re willing to put into a house that won’t be their main space and the property’s potential appreciation.

Mike Wise, Executive Director Senior Lending Manager at JP Morgan Chase, says that planning is key. “I think [home ownership] is a wonderful idea—if you take everything into account and have a specific plan from folks you trust to help you put it together.”

It’s also important to consider whether your second property makes financial sense over the long term. That means looking at long-term fluctuations in your income, the increases in expenses that will come with paying two sets of bills, and whether you’re ready for unpleasant surprises. 

“There are a ton of things that pop out of the woodwork,” says Wise. “If you don’t have a rainy day fund, you can really get into trouble.”

How soon can I rent a house after buying it?

The timeline for renting out a house after purchasing it depends on several factors, including the type of financing you used to buy the property, local laws, and any restrictions in your area or community. 

Here are a few things to consider: 

Mortgage restrictions

If you purchased the house with an owner-occupied mortgage (which often comes with lower interest rates), lenders typically require you to live in the property for a certain period (usually 12 months) before renting it out. Check your loan agreement for specific terms.

On the other hand, if you bought the house with a loan intended for investment properties, you can usually rent it out immediately since the lender already knows your intent. 

You should also check your mortgage for the following clauses before you take the plunge:

Local laws and regulations

Some cities or homeowner associations (HOAs) have rules about renting out properties. For example, there may be restrictions on short-term rentals (like Airbnb) or a waiting period before you can lease the property. Be sure to check local zoning laws, rental licensing requirements and HOA rules.

Preparing the property and your finances

Before renting, you may need time to prepare the property, such as making repairs, cleaning or staging it for tenants. This timeline depends on the condition of the house.

You will also need to make the switch from a homeowner’s insurance policy to a landlord insurance policy to make sure you’re covered for tenant-related risks. And because renting out a property has specific tax implications, like reporting rental income and deducting expenses, you should consult a tax professional before making the change, too.

In summary

Buying a second home and renting the first can be a strategic way for you to build wealth, diversify your investments and create future flexibility, all while tailoring your living situation to your evolving needs. Start exploring mortgages today!