Beach Condo Financing?

Question

I have been doing the single-family thing for a while and am looking to branch out.  I found a condo near the beach outside Charleston that I am interested.  Ran the numbers, checked comps, talked to the condo's HOA committee, went through the property my realtor and it appears to be a decent investment.  I called my lender to get a pre-qualification letter (I have worked with him for years) and he said that there is some restriction on condos that is preventing me from getting a traditional mortgage.  I haven't invested in condos before and didn't really understand the problem, but he said it was a Fannie Mae, Freddie Mac rule.  It was something about it not technically being a "second home" because I live less than 50 miles from the property and because the renters would be short term vacation renters with leases less than 1 year.  I have started talking with commercial lenders to compare terms and rates and see if the property still cash flows.  Can anyone shed some light on what requirements/restrictions may be placed on financing a condo as an investment property (I don't intend to use it for personal use...unless, of course, that helps me close the deal  :-)  ).   Do you have any suggestions of other creative financing I should consider?

Justin Smith · Answer

When I spoke to Angel Oak Lending per your recommendation I ended up with a 30 year fixed for about 7% (based on my specifics, but you might find it to be between 6 and 7% for yours) that they "might" be able to close for me based on some specifics and my personal financials although they sounded optimistic. I decided to hold off on that because I have other options.

Basically you can't get conventional financing on an investment condo unless it meets Fannie/Freddie rules, one of the most important is the following:

 If the unit is used as an investment property, at least 51 percent of the total number of condominium units must have been conveyed to purchasers (other than the developer or a successor to the developer) who occupy their unit as a primary residence or second home.

There are other deal breakers, and I'd guess that the short term rental probably is one too. Here's the document I've used to help understand the rules:

Underwriting and Origination Rules

The options I'm aware of are cash, portfolio lender like Angel Oak, actually buy something eligible as a second home, or buy it and move in for a year. If you want to get more creative though Brandon Hall style, maybe you could ask a family member who lives further away to buy it as a second home and carry the mortgage.

David Lowe · Answer

Justin Smith We have called several commercial bankers and portfolio lenders, but this deal doesn't look like its going to work out for us.  We picked up one property in August so we can't count the income from that but the expenses still count against us.  This is killing our debt-to-income ratio right now for commercial lenders.  The portfolio lenders will let us count that income even though it isn't on our W-2.  We spoke with a lot of people so my numbers may be off, but I believe we were finding commercial lenders offering 4-4.5% with 20% down for a 20-year loan that can be called in 5 years, 5% with 25% down for a 30-year loan, and portfolio lenders with 5-6% with 25-30% down for 30-year loans.  We had been running numbers with 4.5% with 20% down for a 30-year mortgage, and none of those numbers worked for this deal.  I have been learning a lot about condos and commercial financing throughout this process and made some connections to hold onto for future investments.

Our strategy right now is to find a SFR in the range of $140-160k to go ahead and max out my traditional mortgages, and then look at properties that will require more complicated financing.

Thanks for your advice!

David Lowe · Answer

Justin Smith That sounds like what my lender was describing.  We have spoken with two other lenders at this point and they are saying the same thing.  I am now looking into commercial loans to see if the condo would still cash flow, and I'm planning to see if the owner would consider seller financing.  It never hurts to ask :)

I like the idea of partnering with a family member to carry the mortgage.  While this deal should have a decent cash flow, it isn't the home run I would want if I'm involving family.  I have been putting the bug in some family members' ears and telling them success stories, but this particular deal isn't the one to bring them in on.  Do you have any advice on how to structure a deal like that?  If we formed an LLC or partnership, wouldn't that push us into a commercial loan, which I can get on my own without a family member?

Thanks for the help!

Justin Smith · Answer

Sorry David, I don't know the legal logistics of structuring that particular idea.  Have you been able to find a commercial loan for this condo? How have your progressed with financing in the past week?

Beach Condo Financing?

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