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Updated over 7 years ago, 08/30/2017
Financing Options on VRs? Hard Requirement on Investment Loan?
Hi All,
Currently pursuing the VR market and I've been researching best options for financing a VR property and need some clarification. To point out, this will be our 1st VR. As I understand it there are 3 main options (4 if you include paying cash...I wish:) 1. Conventional Loan at 10% minimum down. 2. Investment Property Loan at 20% minimum down. 3. HELOC against primary residence.
My issue is understanding what if/any implications exist for going the Conventional Loan route and the lender attaching a "Second Home Rider" in the loan agreement. What issues does this cause? Does this setup some potential legality issues since we'd plan to AirBnB/VRBO the property greater than 75% of the time? Our underlining issue is the 20% down. I've looked into HELOC, but I will reserve that option for leveraging the 1st VR against a loan for a second for scaling the portfolio, leaving our VR(s) unassociated from our primary residence.
Any guidance and thoughts are greatly appreciated.
I think it depends on the lender, however I have purchased two additional properties using conventional lending. The 2nd unit was at a slightly higher rate. I did disclose that they were rental properties but there was no where in the application to decipher between short term and long term rentals (and no one asked). As with any closely held business, I view it as being a business owner and it comes with some risk and the banks are going to secure your personal assets against any investment. So far, so good. I then spun an old 401k into a Solo 401k and have been using these funds to buy property with cash - all costs and proceeds flow in and out of the 401k. A very cool way to create future retirement wealth by controlling your own interests.
Mike
Thanks Michael Greenberg I have read it depends on the lender. Thanks for the feedback on the 401k option, I've used mine to help purchase our primary, but I'm intrigued to look further into how your suggestion of using a 401k to manage future property purchases.
@Brett Shoemaker - Like Michael, I have two investment properties, both with conventional loans, and the second one at a higher interest rate. I have found it challenging to get financing for a third property based on the amounts of my current loans. It's strange because other factors don't seem to matter, e.g. my real estate equity, income, credit score, etc.
@Michael Greenberg - How did you arrange the financing from your 401k? Did you incur a withdrawal penalty? What are the terms of the "loan" you are taking from the 401k? Sounds like an interesting option. Please PM me if you're open to a quick conversation. Thanks.
I've done quite a bit of research on buying real estate through a self directed IRA with rolled over 401K funds. It's very intriguing but it can get complicated. Just the set up itself can be complicated but once there it's straight forward. There are no withdrawal fees since you're technically doing business within your IRA. You can just never use the property for personal use, you cannot physically do rehab yourself, and even managing through booking sites on your own is still a gray area legally.
@Michael Greenberg did you go as far as setting up a self directed IRA LLC with Checkbook control? That seems like the way with the most flexibility and the way to avoid all the fees if you use a custodian.
It appears as though @Michael Greenberg opted for a Solo 401k which does not need an LLC to have checkbook control. A self-trusteed Solo 401k has more direct control since, unlike with an IRA, there is no custodial requirement.
@Ethan Cooke I tried to post a note to you yesterday but it looks like it rejected my attempt. Anyway, hopeful you received my email. @Jeff Piscioniere I setup a SOLO 401k with check writing through Fidelity. I can send you specifics if you want to PM me, BP won't allow it on the dashboard. @Justin Windham you are correct :-)
Mike
@Michael Greenberg I got your PM. Thank you!
@Justin Windham @Michael Greenberg @Ethan Cooke @Jeff Piscioniere - Thanks to all of you for your responses, time to call Fidelity myself.
@Brett Shoemaker You'll need to find a intermediary to setup the Solo 401k. I'll PM you who I used.
@Michael Greenberg is correct. Fidelity does not offer Solo 401k plans that can invest into alternative assets such as real estate. In this case, they are just providing an investment account (possibly with checkwriting features) for the self-directed 401k created by a specialty firm. Although many of our clients will simply open a checking account for their Solo 401k at a bank, some will open brokerage accounts instead or in addition to those checking accounts. As the Solo 401k trustee, these decisions are yours to make.
To learn more about the Fidelity brokerage account with checkbook control for a solo 401k plan, please see the following.
https://www.biggerpockets.com/blogs/3441/24895-self-directed-401k-fidelity
Justin Windham George Blower Thank you. I did speak with Fidelity yesterday and I received all the details I needed.
