Is it a wise investment to buy a second home and rent out the first?
I currently live in a house that I own with my parents. 2 years ago I got a job which lets me work remotely,and since then I wanted to move out of state because this house is in an state with killer property taxes (currently paying 00 a month). Right now we cannot sell this house (for some complicated reasons), so the only way I can move out is if we rent it out.
I also want to buy a house in the state which I move into. This house will cost around 0,000 and my down payment will be ,000 (a good chunk of my savings). If I can save around 0 in less taxes and make around 0 in profit from my rental first house, then would this be a smart move? Assuming I stay in my new house for at least 10 years.
Would it offset the cost of my down payment, interest payments on the second mortgage, closing costs, moving, and the headache and risks of being a landlord?
In other words, would an extra 00 in my pocket every month be worth buying a second home and the trouble of renting out the first?
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It might be "wise" to do it with little to no debt - the more debt you add, the riskier the proposition.
When you add debt, you add monthly debt payments, which eat into your returns and increase the risk that you won't make enough income to make the debt payment, at best causing you to make up the difference from other savings, at worst resulting in foreclosure.
On top of that, houses are expensive assets, whether you live in it or rent it. You need enough cushion in your cash flow to deal with maintenance, deal with renters, etc.
There's no pure mathematical way that I know of to determine if a situation like yours is a good idea. If you have a lot of ability and tolerance for risk (meaning you have cash reserves to handle losses and don't make unwise decisions when times are bad) then you might come out ahead. But many people end up either losing one or both of the homes, or find that the money tied up in the rental is not worth the lower returns after debt payments.
To be fair - you asked if this was "wise". That's a fairly subjective question, but if you look at it from a risk/reward standpoint, figure out how much return you'd get in the best case (always fully rented, reasonable maintenance costs, etc.) then figure out what happens if you go months without a renter. Or the A/C goes out. Or you have a termite infestation. All of those things introduce risk. Debt reduces your return without reducing risk- you have a payment that you have to make whether you rent the place out or not.
It might be hard to quantify the risk and expected return, but compare them to a stock market investment that earns about 8% on average, and can range from -30% to +50% in a given year. Now look at the possible downside of your housing investment. Can you lose more than 30% there? If so, does it generate enough return (on average) to compensate for the extra risk?
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