Pros / cons of buying a rental without a primary home?

[ellipses84]

Hear me out on this unorthodox idea. We live in a great, affordable, long term rental in a city that is a big tourist destination with year round nice weather and beaches. We’d love to buy a primary home but to get something comparable to what we have is $900k+ for a 4 bedroom 2 bath. Our mortgage payment would be significantly more than we pay in rent, even with low interest rates. Ideally we’d buy a fixer upper for a little less, but while I have the professional experience for a huge project, I don’t really have the time or desire at this point in life to live/ work in a construction zone or pay double $$$ rent/mortgage for a long time. I expect that to change as my kids get older. Nobody else in the family wants to move anytime soon.

The soonest I could see us buying a primary house is 1 year but more likely 3-5 years. Realtors we’ve talked to suggest we try to buy our current place but it’s not everything we want and we are not 100% sure we want to stay in our neighborhood. We plan to stay in the county forever.

I feel like we are getting priced out of the market, I’d love to take advantage of low interest rates, and I have a lot of creative frustration with not being able to do what I want to renovate and decorate our current place.

I’ve considered buying a Studio, 1-2 bedroom, or cabin rental, which could be short term or longer term. I feel like this could be a more affordable, manageable project and we could hang on to it for a long time or sell it later to finance a primary home purchase, knowing the primary home purchase could push out 7+ years.

I lean towards something in our county, within a 30 minute drive. I always hear friends asking for short term rental recs and we know so many out of town people who visit. If it were a 2 bedroom I wouldn’t be opposed to moving in for a year or two if our landlord decided to sell our current house. If we decide not to ever buy a larger house, we could move in to downsize when the kids move out.

We’ve also considered some other places that would be 1-2.5 hours away but those would be either a very rustic cabin only for us, or we’d need to rent them out as vacation rentals, and they’d be harder to manage or visit frequently (we’d likely hire a property manager).

What does MM think?

[tacokick]

I don’t think this uncommon in some areas. I know a few friends/ILs who rent in NYC and own a home they rent out either entirely or most of the year elsewhere for similar reasons to you. In some cases it’s a home for their future retirement in others it’s a vacation home or an inherited home they hung on to. One friend rents in NYC and bought a place upstate to use as her studio and hosts artist retreats there.


I’m not sure there are any cons to the arrangement beyond the usual hassle of having two homes but at least you aren’t responsible for the upkeep and repairs of where you live! Everyone I know who is in this situation really loves it.

[wanderingback]

I don’t think it’s unorthodox.
I have no desire to have a rental property, so that doesn’t appeal to me. But if that’s your goal then go for it.
I do know taxes are different for a rental home and I believe sometimes if you get a mortgage for a rental home they require a down payment that’s higher than if it were your primary home and the interest rate might be higher, but if you’re ok with that then no biggie.

[brooke77]

I don’t think it’s a crazy idea. My H looked into this when we were dating. It would have been an amazing investment, but he couldn’t make it work. As PP’s mentioned, the financing of a secondary home can be tricky. When my H looked into it, to get financing, you had to prove at least 2 years as a successful landlord OR you could only finance about 60% of the property amount and the interest rate was pretty high. My H ultimately decided he was better off keeping his cash in other investments - but I don’t think it’s a crazy idea at all if the numbers work out.

[wildrice]

I'm not an expert or anything, but I am pretty sure you can't deduct mortgage interest on a home that isn't your primary home. With the standard deduction being higher now that may or may not impact you anyway (we can't deduct interest) but might be something to keep in mind.

I have zero interest in owning a rental, ever. One thing I don't really understand is why you want to do this - is it just fear of missing out on a good opportunity with low interest rates? How much do you think you'd net per month if you had a full mortgage, plus upkeep, to pay out of the money that you collect from rent? You mention you don't have the time to deal with a renovation of a primary home - do you really feel like you have time to manage it on a home you have to drive 30 minutes to get to? What if you get to a point where you want to buy a place for yourselves and this one doesn't sell so you can't use the money tied up in it?

I don't mean to shoot down the idea, just thinking of some things I'd consider in your shoes.

[tacokick]

I wish I had a second home 30 minutes away to live in while I had work done on my primary house, not going to lie!

The tax and mortgage issues are really going to be tied to if it will be a vacation home or a rental property same as it would be if you owned where you live now.

I grew up with my grandfather having a fishing cabin not far from where he lived in the city and we spent half the week every week each summer there. It was a little weird to have two houses so close together but really great for maintenance and actually using the property. I think if it was too far we wouldn’t go. It was a lot of fun to leave the city and then be in the country for the day/weekend.

[ellipses84]

[mention]wildrice [/mention] I appreciate the reality check. Since we plan to stay here forever, it feels like we should invest in the real estate market or else we could possibly be priced out permanently. Prices have skyrocketed so quickly our pay will never catch up if that happens again. It seems like that happened to a lot of people in the San Francisco area. The only time prices have dropped significantly here was in 2008, and is the only reason we were able to buy our first home. We sold it because we moved out of state and didn’t want to rent from afar, but that was probably a MM mistake. Prices level off, then every couple years they have a big jump.

I’ll have to look into financing. Having to pay 60% cash would be an issue but I don’t see how they would differentiate someone who was buying to renovate and live in vs someone who is buying and renovating to rent, if they don’t have a first mortgage. Someone’s plans could change during the renovation process.

[wanderingback]

Mar 2, 2022 10:28:19 GMT -5 ellipses84 said:

[mention]wildrice [/mention] I appreciate the reality check. Since we plan to stay here forever, it feels like we should invest in the real estate market or else we could possibly be priced out permanently. Prices have skyrocketed so quickly our pay will never catch up if that happens again. It seems like that happened to a lot of people in the San Francisco area. The only time prices have dropped significantly here was in 2008, and is the only reason we were able to buy our first home. We sold it because we moved out of state and didn’t want to rent from afar, but that was probably a MM mistake. Prices level off, then every couple years they have a big jump.

I’ll have to look into financing. Having to pay 60% cash would be an issue but I don’t see how they would differentiate someone who was buying to renovate and live in vs someone who is buying and renovating to rent, if they don’t have a first mortgage. Someone’s plans could change during the renovation process.

In regards to how they would differentiate obviously you could lie lol, but I’m sure thats not recommended.

My situation is a little different because I rent/work Mon-Thurs in a different city than where my mortgage is, so when they saw where my pay stubs were coming from they asked for more details. So me and my partner had to testify in writing that the place we have our mortgage on isn’t a rental property and that we live there but we just go back and forth, which is the truth. Plus if you’re currently renting they’re going to likely ask for a letter from your landlord. They ask for a lot of paperwork and proof when applying for a mortgage.

So yes you could lie and say you plan to move in but that’s probably not the best idea for a variety of reasons.

[minzy]

We have kicked around the idea of buying a rental, but never very seriously. We have some money invested in some kind of real estate mutual fund though, which sort of scratches the itch, I guess? Have you looked into that as an option?

[purplepenguin7]

I would be cautious with this idea. Why do you want to own a non-primary home? Do you want a weekend/holiday getaway place? Do you want to rent out and try to make a profit? Or do you just feel like you should because interest rates are low? As someone who bought in 2008 and was highly burned by the crash I would advise against this unless it was something you wanted for personal use.

also there are "rules" to obtaining a mortgage for non-investment purposes that include you having to take residence within 60 days. I am not sure how exactly they check that and I'm sure you could skirt around it. But there are definite differences in mortgages and taxes for properties you don't intend to live in.

[bee20]

I'd dig deeper into the AirBnB side and check to see if there are vacation management companies in your area and what your potential losses are.

I bought a house in a non-vacation area 10 years ago. Due to life circumstances it's no longer a great fit so I looked at renting it out and moving to another area of the same metro area. What I found after talking with some rental management companies is with long-term rentals managed through a company you have very few protections as a landlord in my area. It can take 6-12 months to evict while they are damaging the place, tenants can declare their pets "comfort animals" and bring in as many as they'd like, and other shenanigans. There are more protections if you are living in part of the residence or renting it yourself, but then you have to live with your tenants or answer the 2am clogged toilet call. My area is very tenant-friendly so you'd want to understand what your liabilities are and what you're not allowed to do. I decided in the end it's not worth it for me, and still live here because frankly, despite buying 10 years ago I'm still priced out of the nicer neighborhoods.

Friends in the same city in more desirable neighborhoods are able to keep their old homes as AirBnBs and do very well. Since it's short term there are not as many opportunities for problem tenants. Most of their tenants stay for 30-60 days and are in town for the birth of their grandchildren, healthcare services, or other medium-term activities. She has a company that focuses on AirBnB rentals clean and reset the place during tenants so it's very little work. Alas, in my less desirable neighborhood the listings I see don't look highly booked.

In summary, it might be worth it if you can AirBnB, and even getting on the property ladder doesn't mean you'll be able to afford where you want to live in the future.

[1yeartogo]

If you buy as a 2nd home it has to be 60 miles or more from where your primary residence is. Then you can’t rent for at least 2 years if you are claiming it as a “home”.

If you get it as an investment property your interest rates abd down payment will be higher. You have to look at the bylaws of the towns and communities your are interested in to see if they allow rentals many areas have restrictions on short term rental so you have to be careful about that. Mortgage rates on investment property right now are not super great and the fed is expected to raise the rates multiple times this year to help deal with inflation so I would think the next year will only get worse in this respect.

I close on a property in April and everyone basically said I’m getting in at the worst time