Second Home Loan for a Rental...would you sign this?

Question

New investor here with a question on getting a second home loan vs. a private money construction build loan. the reason being that I don't have the money to put down for the private money.

Would you sign this rider (below) for a build-to-rent property knowing that you are only planning to rent it out? What are the ramifications? Will anyone ever know or care?

This option has been presented to me with assurances that many have done the same with no problems. Is this common practice? No big deal? Or should I steer clear? What is a worst-case scenario?

James Gillice · Answer

This is also for a new build in Cape Coral (through a turnkey company). Seems like a great opportunity, but I'd like to know how you got that financing. Let's connect...I've got a few questions.

Jassen Bowman · Answer

If you sign as a "second home" loan, how would you feel about standing in front of a judge to explain what you were trying to do?

If you're comfortable explaining it to a judge, then there's you're answer. If you wouldn't feel comfortable explaining it to a judge, then there's your answer.

Mortgage fraud does get prosecuted. I know of a few real estate investors currently serving prison sentences for intentionally misstating the purpose of a mortgage loan.

Patrick Bavaro · Answer

@James Gillice I have done It and the answer I’d give is It depends. When I signed my second home

Rider, I did It through a construction to perm loan on the front end, meaning I signed all closing documents before the build even started and when it’s done It will just convert to a permanent mortgage without having to refi. The second home rider states “1 year from effective date”. So I signed in July, property will be complete around July of next year. I spoke with my REA and he said I would be in the clear according to the verbiage on the rider.

Currently I’m building a 4/3 new build in Cape Coral. Total all in cost is about $265k and I financed It at around 3.6% with 10% down. Rents right now are at about $2300 and climbing. Currently post construction appraisals are coming back at $340k-$410k depending on location of the property. If I play my cards right I will be Anel to do a cash out refi, still cash flow decently and take all my equity out to do it again. I’d be happy to connect to share experiences. Good luck!

Colleen F. · Answer

@James Gillice probably less of a risk if it is your lenders representative.  It is possible someone at a higher level may refuse to underwrite the loan if they see this as a pattern but I don't have personal experience with this. It is still misrepresenting your intentions if you sign a second home rider and it isn't a second home.

James Gillice · Answer

The rider is from the lender who is aware of the nature of the purchase. He just said he doesn't give his opinion on the matter. So if the lender is in on it, who is it that would be opposed?

Colleen F. · Answer

@James Gillice  your rider doesn't show up but this is a tactic some use. Was this put out by the builder of your community?  There is a risk that the lender will call the loan when you represent it as a second home when it is really a rental. They would then require you to come up with alternate financing.  Not sure how often that happens.