Oklahoma is a great place to buy a second home to rent. Whether you’re looking to buy a home to rent to college students in locations like The University of Oklahoma in Norman or the University of Central Oklahoma in Edmond, or you’re looking to rent as a family unit style in Oklahoma City, there are many options to consider.
Some people believe that the process for buying a rental property is just like buying their first house. That may be true only to some extent.
Let’s cover some of the most important things you should know before buying a second home to rent.
Jump through the topics below or keep scrolling!
- Pros and Cons
- Decide your Strategy: Long Term or Short Term
- Run the Numbers
- One Percent Rule
- Choosing a Location
- Handling Additional Responsibilities
Pros and Cons of Buying a Second Home to Rent
The pros of owning a rental property:
As a landlord, there are several benefits you will enjoy. Some of these include:
- The property can offer an extra source of rental income.
- The rental property will typically increase in value as time passes. Location and maintenance are two big factors that will play into the long term value of the home. If the property is in an undesirable location then value can plummet. Regular maintenance and updates are also important. When it’s time to sell, a well-maintained and updated home will typically fetch higher value.
- You open yourself up to additional tax deduction opportunities. There are several tax deductions for rental property owners. Some of them include repairs, depreciation, operating expenses, mortgage interest, property tax, advertising, utilities, insurance, etc. Seek the guidance of a tax professional who can guide you on how to approach this.
The cons of owning a rental property:
- It is financially demanding. There are initial and ongoing expenses you should expect as a landlord. These include initial closing fees, ongoing maintenance to plan for, yearly taxes, etc.
- It can be time consuming, and at times emotionally draining. You’ll need to make sure you’re up to date on rental laws and procedures with tenants. If your property is seeking long term tenants rather than short term vacationers, then that will affect how you deal with rent fees and delinquent payments. A property manager can be a good solution if you would rather hire a professional to handle these affairs.
“Rental properties are a wonderful way to have tax-advantaged investments. With depreciation offsets and other deductible expenses, it can be great for the right taxpayer. With proper planning, there are great opportunities to take advantage of these deductions. Some of these tax planning opportunities include cost segregations, real estate professional status, short-term active status, and 1031 exchanges. The key to rental property ownership is proper planning. There are passive activity rules that limit losses and potential depreciation recapture rules if sold. Many issues need to be considered and discussed with a CPA.”
– J.C. Airington, Senior Tax Manager and CPA with Airington & Associates
Decide the appropriate rental strategy: Long term or short term rentals
If you want to benefit from real estate investment, you need to work out the appropriate strategy. One of the primary decisions you’ll need to make is how you’d like to rent out the property.
Renting out a property anywhere from 1 day to 1 month is typically seen as ‘short term’ rental. These types of properties traditionally are in locations with a regular influx of vacationers. Short term properties must be marketed more, but they also can fetch greater returns since higher rent can be charged.
Long term rentals will have the advantage of more stable tenants, but it may take longer to see a return on your overall investment. Long term rentals may be a good solution if your property is in a typical neighborhood (and away from tourism). Landlords for long term rentals typically do not pay for utility payments, and renters typically take care of basic maintenance.
Ensure that the investment strategy you choose is appropriate for the type of property you purchase.
Run the Numbers
Run the numbers with an online mortgage calculator before you begin looking at possible properties, so you can stay within your budget. The mortgage payment for rental properties is typically higher than for your primary home.
Your lender will evaluate your credit score and debt-to-income ratio. These two things will determine your interest and mortgage rates.
If your first home has a mortgage, ensure that your income can cover both mortgages while your debt-to-income ratio remains less than 41%. Remember the down payments and other expenses too. Most times, you may need a down payment of 20% of the purchase price to avoid paying PMI.
Consider other expenses as well, such as initial closing costs, ongoing maintenance, cost to furnish the property (if doing so), and if you’ll be using a property manager.
Does the property need some updates? Checkout our list of 9 steps and best questions to ask before hiring a local contractor.
Your real estate agent will ask to make sure you’re verified before they help you begin looking for possible properties, and will work to help keep you in your needed budget range as well.
Consider the One Percent Rule (or 1% rule)
As you’re figuring out the monthly mortgage payment, you’ll also need to figure whether the rental income you’ll receive will make this investment worth it. The one percent rule is a commonly used measurement tool to help an investor know whether the rent will be greater than or equal to the mortgage payment.
Multiply the purchase price of the property plus any necessary repairs by 1%. The answer is the base level of monthly rent. You can then compare this answer to the potential monthly mortgage payment. This information can help you determine whether the property is a worthy investment.
Keep in mind that you’ll want to also factor in ongoing maintenance, property management fees, or any other ongoing fees to get a truer depiction of what you might expect.
Research your available financing options to purchase the property
Although there are numerous financing options when buying a home, the most popular ones are conventional mortgages. Conventional mortgages have requirements such as down payments, credit scores, and debt-to-income ratio. Evaluate with your lender whether you can meet these conditions.
Financing with equity may be preferable for those with enough equity on their primary home. You may also consider partnering with another real estate investor or sourcing for the down payment from friends and family members. Talk with your lender about possible scenarios, and how each of these will affect your long term strategy.
“Working with an experienced lender makes all the difference because you can rely on years of knowledge and experience. This is especially important in today’s ever-changing real estate landscape. When working with clients, I like to take a look at all options available to find the right solution. It sometimes takes some creativity and flexibility but we are always happy to help.”
– Brent Clemmens, Vice President of Lending at Oklahoma’s Credit Union
Choose a desirable location
The location of your investment property should align with the goal of your rental strategy. If your goal is to obtain long term tenants, then perhaps your property is in an up-and-coming neighborhood nearby with plenty of shopping and eateries, making it desirable to a family.
Conversely, if your strategy is to appeal to short term guests, then your investment property will need to be in a location that attracts short term visitors. Locations could include nearby a sports tournament location, or other popular sources of activity and entertainment.
If looking for rental properties outside of Oklahoma, then popular locations may be specific for vacationers such as a beach or other outdoor activities.
Choose the neighborhood and location with just as much care and attention as if you were choosing your primary residence. After all, someone is going to be sleeping and spending time there and you want it to be a positive experience for your tenants or guests.
As you’re determining the location, take into consideration the rental strategy, the potential of return, occupancy rate, nearby infrastructure, taxes, amenities, regulations, and the local economy. All these factors will point you towards an ideal location for your home.
Your real estate agent will be able to assist with suggesting potential locations to align with your strategy.
If you’re ready to start looking for properties, but still have questions, check out our roundup of most popular questions about Working with a Buyers Agent!
Have a plan for handling the additional responsibilities
Owning a rental home requires time and energy. As a landlord, you have several responsibilities such as:
- Tenant screening
- Rent collection
- Regular maintenance
- Emergency repairs
- Marketing the rentals
- Lease agreements
- Evictions
- Keeping current on rental laws
These tasks may be cumbersome for an already busy person. If you do not have the time or energy, you might consider hiring a property management company for a minimal fee.
The bottom line
Buying a second home for additional rental income can be a great experience! Your real estate agent will be available to help provide guidance on the local market and economy. It is wise to take your time and really do your research before jumping into a second property.
When you’re ready to start the search to buy your first rental property, contact Jimmy at JMR Realty to get started.
Jimmy Hughes is the owner + broker of JMR Realty. He works directly with home buyers and sellers in the Oklahoma City Metro and Edmond areas. He loves saving sellers their equity by listing at 1% or $999 flat fee.
Call Jimmy at 405-888-3148 or email him at jhughes@jmrrealtyok.com