1st Rental Property Deciding on Rates and Terms

[Karen Kushner]

Hi All! I am under contract on my first STR beach property. $1 million home. 20% down. 800k Mortgage. The plan is to put the property in an LLC at the onset (I heard this was easier/better rather than putting in personal names and transferring after the fact).I was given the following rates.

• 30 year fixed: 6.875%. $5255/mo
• 15 year fixed: 6.5%. $6969/mo
• 10/1 ARM. 6.5%. $5056/mo

We currently have a 15 year fixed on our primary home as we wanted to go into retirement debt free on the primary home. However, for a rental property we may feel differently as it is an investment and not the roof over our head. In general, what is the strategy for choosing rental terms in the current market? Take as long as possible and then refinance? Or try and choose the best rate available? Our projected rental income is about 75K annually. Thank you!

[AJ Wong]

HI Karen and congratulations! I would say error on the side of caution with an STR as income can be sporadic. One strategy could be to make accelerated payments on a 20-25 or 30 year mortgage which can reduce the scheduled payments 6-7 years. Those are healthy rates for a investment property with a larger loan amount. Good luck!

[Jason Wray]

Quote from @AJ Wong:

HI Karen and congratulations! I would say error on the side of caution with an STR as income can be sporadic. One strategy could be to make accelerated payments on a 20-25 or 30 year mortgage which can reduce the scheduled payments 6-7 years. Those are healthy rates for a investment property with a larger loan amount. Good luck!

Karen I have to agree with AJ Wong, as a Banker I have to double down on what AJ mentioned for the 30 Year 10/1 ARM. Take the longer amortization and the lower rate where you can make Bi-Weekly payments and add a little extra each month to manipulate and lower the rate and the term. A simple Bi-Weekly with added payments can pay off a mortgage in 10-12 years.

This strategy allows you to pay more at your own pace having a failsafe unlike a 15 year where you are obligated to pay more every month. Since you mentioned retirement its always good to be prepared for the "What if factor" meaning "If" something should happen or come along unexpected. In life we get caught off guard with Health issues, Death in the family, Loss of business or jobs (Unexpected pandemics!).

“If you fail to plan you are planning to fail”

[Robin Simon]

Quote from @Karen Kushner:

Hi All! I am under contract on my first STR beach property. $1 million home. 20% down. 800k Mortgage. The plan is to put the property in an LLC at the onset (I heard this was easier/better rather than putting in personal names and transferring after the fact).I was given the following rates.

• 30 year fixed: 6.875%. $5255/mo
• 15 year fixed: 6.5%. $6969/mo
• 10/1 ARM. 6.5%. $5056/mo

We currently have a 15 year fixed on our primary home as we wanted to go into retirement debt free on the primary home. However, for a rental property we may feel differently as it is an investment and not the roof over our head. In general, what is the strategy for choosing rental terms in the current market? Take as long as possible and then refinance? Or try and choose the best rate available? Our projected rental income is about 75K annually. Thank you!

 What kind of loans are these - seem like pretty solid options regardless - conventional loans?

[Derek Brickley]

Hey Karen!  

Agree with what has already been said.  My question would be what kind of lending are you looking at with those terms and are they charging points for that? 

[Patrick Roberts]

As the others have said, I would not take a 15yr on something like this. Take a 30yr option and then ask the lender for a 15yr amortization schedule using the terms of your loan. You can effectively convert it to a 15yr loan by making payments on the 15yr schedule, but still have option of making the minimum (lower) payment if cashflow gets tight. 

I also would not pay any additional principal until you have dedicated reserves for this property - STRs can be more volatile than LTRs so you'll want to be more aggressive about hedging that risk. You can take any reserves and ladder them with CDs/Treasuries/some other low-risk fixed income asset to provide liquidity in case things go sideways, all while mitigating most of the interest load on the loan. 

Last point - if the options you listed are Conventional loan options (that's what it seems like), it's unlikely that you'll be able to close in an LLC. This will depend on the lender and their model (whether they're selling or holding this loan).