Can I claim a second home/vacation rental as my primary residence?

Question

The answer is no!

And a criminal case this week shows why you shouldn't mess around with this rule. (For those averse to reading ... a State’s Attorney is on trial for claiming on loan applications that she'd reside at homes  when, it turns out, they were simply STR investments.)

I get this question from STR clients here in Colorado enough to concern me. I just say bluntly, "No, that's mortgage fraud, which is a federal crime."

I'm a little harsh here, but I understand where this question comes from. This site here and other real estate investing sites perpetrate the idea that you need to "get creative" with your investments, find loopholes, etc. There's nothing inherently wrong with thinking outside the box, but so often what's portrayed as "creative" with vacation rentals is actually just illegal.

For anyone who thinks well, that's a stupid rule, here's the reasoning behind it. You get better terms on a primary residence -- lower interest rate, lower down payment requirements -- because if you encounter financial strain, you're most likely to pay the mortgage on the roof over your head. Your rental property payment comes second. So to a bank, rental properties are a slightly higher risk and the terms are meant to offset that higher risk to them.

Rant over.

Michael Baum · Answer

So I have brought this up from time to time and a lot of folks have felt it wasn't a big deal. Most of the time it isn't.

This time, not so much.

I will say that there are a bunch of other moving parts here with the lien and IRS back taxes owed along with it being someone who had been in the daily news cycle. So it isn't just about the mortgage fraud.

Craig Jones · Answer

I've sometimes thought about a "getting creative" business model where I can do this without running afoul of any rules.  Acquire a property, live in it as my primary residence (for reals) while I'm rehabbing it, then convert it to STR after I've satisfied the primary residence conditions of the mortgage (usually 1 year).  Move on to the next one.

Kelly O'Keefe · Answer

Thanks for the post and tying it to a court case. I have been hearing this question more and more lately

Michael Baum · Answer

Yeah, a lot of times the mortgage doesn't state that it must be occupied as a primary residence. Even if it does, many mortgage companies really don't care too much as long as the payments are made on time.

That doesn't mean anyone should commit mortgage fraud. Just take the time to keep it on the up and up.

What surprises me is that the lien didn't come up during the mortgage process. Doesn't make a lot of sense really. Unless they really never looked at the existing properties. These days it really should have come up.

James Carlson · Answer

Totally. This ain't happening if the IRS doesn't come for her for back taxes.

I'm not sure we should learn lessons from that -- you can get away with mortgage fraud as long as you don't commit other federal crimes. But I know what you mean.

James Carlson · Answer

@Craig Jones

That's probably how the majority of investors get their first rental property. My wife/business partner and I bought a 1br condo in Denver in 2015 that we lived in for several years. While living there we bought a tiny studio and did medium-term rentals in it. Then we moved into a 3br condo and made the original 1br condo a midterm rental as well. We did the same with the 3br condo when we moved to a SFH in Colorado Springs.

We're finally in a home where we're likely staying for awhile so our new investments are bought with investment loans, but for first-time homebuyer/house-hackers, it's a great way to get started.

James Carlson · Answer

Yeah, the court case is interesting because I think there's this sense that no one ever really gets prosecuted for mortgage fraud, that if you make your monthly payment, no one will ever come knocking. (That's probably true most of the times). But here's this high-profile figure getting investigated for exactly that.

You could argue that maybe a figure like Marilyn Mosby, in her position, might make enemies and maybe she gets more scrutiny. That could be the case, but if you see real estate as a long-term investment where the real payoff is holding the property for ten or more years, then trying to take a shortcut to shave a few dollars here or there is counterproductive.

Can I claim a second home/vacation rental as my primary residence?

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