Variation on BRRRR for Vacation rentals?

Question

Hello BP,

The Dream:  Buy a vacation cabin, use it once or so a month, rent it out the rest of the time, make the cabin pay for itself.

The Problem:  The the problem with the BRRRR method (Buy, Renovate, Rent, Refinance, Repeat) is that the banks won't take vacation rentals into account for the refinance part.   The bank needs a year lease to consider the income to be additional to my income before they will refinance.  (or so I think from my research)

The Idea:  Do the vacation rental thing with the management company for a  year or two... then offer to Lease/rent the cabin to the management company (or anyone else) with a year lease.   Then, I would have a year lease to show the bank for refi purposes.

I've started looking into it and there is a thriving market in the area I want to find a cabin.   I think I can break even on cash flow at the absolute worst case.   Financing will likely require me to pull a HELOC on my residence to come up with the down payment.

I found a property management company that is very reasonable (10% of rent) and has lots of connections for cleaning, handymen, etc.

So.... would we call it BRVLRVR???    Or perhaps I could go straight to the Lease, BRLRR and turn it to a vacation rental anytime after that 1st year?

Buy

Rehab

Vacation Rental

Lease

Refinance

Vacation Rental

Repeat

Thanks for any discussion on this idea!

Bob

Andrew Davis · Answer

Hey @Robert Mulfinger, I love the creativity!

"However, every realestate agent I've talked to says that the banks will NOT consider vacation rental income as consistent income."

Here's the problem, most RE agents know little to nothing about creative financing, or any financing other than traditional owner occupied.  I'm not being critical or insulting, I happen to be an agent.  I certainly would not take their word as gospel.  You'll want to find a local portfolio lender, who you can present your plan to.  You may need to come in with cash or hard money to start, but once you demonstrate you know what you're doing with a vacation rental, you should be able to get it refinanced.

It does take work and some diligence to find a great local lender, but they're out there.

Keep us updated on your progress.

Bryan C. · Answer

@Robert Mulfinger did you ever purchase a cabin and ultimately refi?  I'm in a similar boat - looking to purchase a vaca rental in cash then refi after 6-12 months.

Kelly B. · Answer

Hi Robert,

We just got approved for a commercial loan for our VR purchase.  It's a smaller local bank that we've already been doing business with for other investments.  This was a bit different for them so I gave them my analysis of the feasibility of such a project.  They gave us a 4.95%, 3 yr term, 20 yr amort, loan with 10% down and some cross collateralization of another property.  We aren't home free yet as the home inspection found many problems, we'll see if the owners baulk at fixing them.

Good luck

Robert Mulfinger · Answer

I found this online spread sheet for vacation rentals that looks pretty good.

HERE

Seems to be from a now defunct website though.

I've been crunching the numbers quite a bit, and I can't understand how any of the vacation rentals around the area are coming out on top.   Quite possibly, they might not be... and are only offsetting their costs as much as they can so they can have their vacation cabin.   I found a place that seems to be reasonably priced, so I don't think the price of the place is really the problem...    Well, I'm going to go take a look at the interior soon and get a better look at the interior.   The place comes furnished, but that could be be a positive or a negative depending on the furniture.

Thanks

Robert Mulfinger · Answer

Thanks again for the replies.   I'm taking a look at a cabin this Thursday and meeting with a  finance broker too.   Do you have a recommended spread sheet for vacation rental cash flow?

Robert R. · Answer

We own 3 vacation rentals and now live off the income from them. When we had w2 income we financed one of them with a bank. The other 2 have no loans and a bank will not lend on them now. We laugh about as we have more income than 75% of the people who live in our town.

Maura Paler · Answer

Yes some banks will allow mortgages on vacation rental investment properties.

We have 4 VR homes, mortgages for 3 of them. The first we paid cash, the second was financed as a vacation home, the last 2 were purchased as investment properties and approved based on our reported VR rental income from currently owned VR's, along with our day job income, so it can be done.

The mortgages are with TD Bank. They do not charge higher interest for investment properties (vs residential) which is great, but the down payment must be 30%.

Like the idea of a portfolio bank who gets to know you and you have a more personal relationship with. Rates may be higher, but the process will be smoother. The stress level getting the last 2 mortgages thru the impersonal process with TD was almost not worth the great (under 4%!) rate. Also - with VR properties we are always competing against cash buyers (retirees looking for their second home) so quick approval is key. We literally bid asking or over asking as incentive for owners to sell to us contingent on financing.

Robert Mulfinger · Answer

Thanks for the reply.   I am making an appointment with a local lending broker who has re-fi'd my residence in the past and has many rental properties himself.   I'll see what he has to say.

My current credit union just does not finance second homes, period.   I'll see about talking to some other banks.

I know I will need to do my due diligence with a business plan, etc.   And honestly, I'm going to have to prove to my wife that the numbers work out for it to go anywhere.  (I'm the dreamer of the relationship, she's the reality check)

We just spent a weekend at a different cabin out in the area I am looking and it was a bit of a disaster.  The more times we spend out there, the more we see how we could do it better....  and I get more excited every time.

Robert Mulfinger · Answer

Roger,  I have not talked directly to any of the local banks yet..  However, every realestate agent I've talked to says that the banks will NOT consider vacation rental income as consistent income.  Apparently they want to see a year's lease at the least.

Any experienced vacation rental owners... what financing did you use to make it happen?   HELOC on your residence to cover down payment and mortgage the rest?

Thanks

Variation on BRRRR for Vacation rentals?

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