Step 2: RENT

You already own a home ✅ and the idea of owning more than one home has never occurred to you. WHY?

Because you’re not an “investor” and for normal, everyday people like us, we have always been told that we have to sell and roll our equity into the next home to be able to afford it.

That’s not always the case. Of course it depends on your goals, but here’s everything you need to know as you consider this next step.

Before you can qualify to buy your next home (Step 3), the bank will want to know that your current house payment is going to be covered aka rented out. 

This is what helps offset your debt-to-income ratio and allows you to qualify for your next mortgage. More on that in a minute.

They will want to see a lease agreement, security deposit, and first month’s rent before giving you the greenlight to buy another home. There’s a variety of ways to provide this so when that time comes we will walk through it together.

What’s important now is for you to understand your numbers.

1. What’s your total cost on the property? 

Principle, Interest, taxes, HOA (if applicable): _____________

Insurance: _____________

I separate out insurance because this cost should go down when you move from a homeowner’s insurance policy to a landlord’s policy. The insurance for one of my properties went down by over $250 per month after making the switch. This is a huge help towards cash flow.

2. How much can you charge for rent?

We will take a look at comps in your area to find the market rate. 

Projected Rent: _____________

The bank will take 75% of this number and apply it towards your debt-to-income ratio. The 75% is their calculation to factor in vacancy rate.

If this number is less than your total cost of the property, this will be considered as debt and is factored into your debt-to-income ratio.

Here’s an example:

• Total Cost: $2,500

• Projected Rent = $3,000

• $3,000 * 0.75 = $2,250

• $2,500 - $2,250 = -$250 considered as debt

3. How much does your property cash flow?

Take your total cost and subtract the projected rent and now you know your cash flow. In the scenario above, you would be cash flow positive with a surplus of $500 per month.

Cash flow is a “nice to have”, but isn’t always a “need to have.” It doesn’t always have to be positive for you to move on to Step 3. This is especially true in California where appreciation is much larger than other areas in the country. 

Every situation is different so it depends on your income, budget, savings, and your tolerance to risk. This shouldn’t scare you away because by this point in the process we’ve already answered all of those questions and have identified the right strategies to get you where you want to be. 

Now that you understand your numbers, you can move onto Step #3 and see what you need to buy your next home.