Mortgage Advice for Vacation Home that will also be Rental.

[Drue Pennella]

Hello everyone. My wife and I are interested in purchasing a vacation home in Martha's Vineyard that we would rent out and have managed. We currently live in NJ and are renters. We do not own a home. We love Martha's Vineyard and would like to purchase a small house there in the $500,000 range. We have one in our sites that is about as turn key as you could get. Newly renovated, small and managable. Our intention is to use it perhaps 4 weeks out of the year. Perhaps one week before the main season. One week in peak season and then over the holidays. We would then rent it out during the main season as a weekly rental which is a very popular thing to do in Martha's Vineyard.

My parents recently passed away and I have been left an inheritance of roughly the purchase price of the house. This is what has made this consideration possible. It means it is possible to purchase something for cash but we do not want to do that of course. We would like to do the 20-25% down senecio with a mortgage. Everything looks good for us to get a mortgage except for the fact that because we rent our apartment in NJ this pushes our debt to income ratio above the acceptable percentage. If we were purchasing it as a primary residence then there would be no problem as our current rent would pretty much become the mortgage payment. This will be an investment property with some personal use. The local island bank we went to doesn't seem to want to include the potential income from the property as part of the equation. We are confident we could rent it out and pretty much cover the mortgage and expenses. We are not looking to have an initial ROI.

We are just starting this process of looking for a mortgage. I also looked into Quicken Loans more to get a prospective from a larger lender.

My question is, is there anywhere/anything else we should be looking/doing/considering when it comes to purchasing this property with a mortgage given our situation?

[Chris Mason]

Originally posted by @Drue Pennella:

Thanks so much for the breakdown Chris. Yes. When meeting with the smaller local bank they where treating it like a second home mortgage and they understood that we wanted to use it but also rent it out seasonally. This was ok with them and they deal with it all the time.

(1) Lets say If we were able to swing a second home mortgage without using any of the projected income as something that helps us secure that mortgage are we still able to treat it as a rental income property? (2) Meaning do we still qualify for tax benefits as if it was a straight up Investment Property that we didn't occupy or use personally for a year?

(3) Is there any situation where paying cash for such property makes sense and then refinance it down the road?

 Hi Drue,

(1) You can still rent it out for most of the year, yes. That's the intent. You go on vacation there once or twice a year, and let others crash there the rest of the year. 

(2) That's more of a CPA question. Tax professionals are not in agreement on the answer. I've seen furnished rental income appear in all sorts of different ways on tax returns. Ask four tax pros, you will get five different opinions. 

(3) Yes, always! Cash buyers get their pick of the litter of homes, and get a cash buyer's discount because they can close quick. Slap the mortgage on after the fact, immediately, via delayed financing. It'll have the cash out refinance rate hit, of course, but that pales in comparison to getting a killer deal on the sticker price upfront, on the home that you got to cherry pick as a cash buyer.